Market share opportunity: We expect Singapore banks to gain market share in loan and capital markets without the funding constraints of many regional peers. Singapore banks benefit from access to the deep currency swap market; term wholesale funding; high domestic savings; and strong foreign fund inflows. We forecast system deposit growth of 10-13% and loan growth of 8-13% in FY12-14E.
Domestic and offshore wealth management: Singapore banks are benefiting from an increasingly affluent domestic population and the country's favourable positioning (tax and regulations) as an offshore banking centre. Singapore has the highest concentration and fastest growing number of millionaire households in the world. It ranks fifth among the world's largest offshore wealth centres. We expect Singapore banks' wealth management income to grow at a 7-9% CAGR over FY11-14E.
Valuation and recommendation: Singapore banks are trading around 15% below long term average multiples. While currently valued at a 30% premium to the regional sector P/E, we believe their strong funding position and earnings visibility justify this premium. Given our cautious view of banks around the region, we would rank the Singapore lenders amongst our preferred exposures in a regional portfolio.
Eoin Treacy's view Singapore has made no secret of its ambition to become the region's private banking centre and assets under management remain on an upward trajectory. While in country last year, I asked an attendee at one of the talks I gave how his business fared during the financial crisis. His response was that it was tough for about six months but then everyone got back to business as usual.
Since 2009 Singapore has been one of the countries that benefitted most from Asia's distance from the epicentre of credit risk. However, ensuing inflationary pressures are now proving sticky. The reticence of the MAS to ease monetary policy has been a factor which weighed on the stock market over the last year. However, that may be beginning to change. The Strait Times Index has been consolidating above the 200-day MA since late January. If it can sustain a move above 3100, the medium-term upside can probably be given the benefit of the doubt.
As a regional financial sector the Singapore market hosts a considerable number of promising chart patterns and respectable yields. (Also see Comment of the Day on March 23rd). The Banking sector has a comparatively similar pattern to the wider market, not least because it represents some of the country's largest cap companies.
DBS Group (3.94%) has pushed back up into the overhead trading range but will need to hold above the S$13.80 area if the medium-term upside is to continue to be given the benefit of the doubt. OCBC (3.39%) and United Overseas Bank (3.27%) have similar patterns.