Singapore banks' 2Q13 results to be dragged by lower treasury earnings in June

Trading earnings are elusive post-bond selldown.

CIMB remains Neutral on Singapore banks, as it believes that the 2Q13 results season will be fairly muted, dragged by lower treasury earnings in June. DBS is the analyst's top pick of the sector for its trade finance delivery and multiple non-interest income drivers.

Here's more from CIMB:

System loan growth picked up in May (+2.2% mom, +9.2% YTD) after Apr’s slack, driven primarily by higher demand for business loans. DBU loans grew 1.2% mom and 7.8% YTD as the growth in business loans and consumer loans outpaced the fall in mortgages.

A S$1.5bn increase in commercial loans and S$1.1bn increase in other business loans accounted for the bulk of the increase in business loans. DBU deposits grew at a slower pace (+0.7% mom, +4.2% YTD), with growth coming from fixed deposits.

As a result, DBU LDR rose 0.6%pts mom to 97.8%. Meanwhile, S$ LDR rose 0.2%pts to 75.8% and ACU LDR rose 0.8%pts to 109.8%.

What We Think
Over time, as interest rates creep up, banks will benefit from higher NIMs. The current movements are all at the long-end of the yield curve and are unlikely to help NIMs immediately, unless banks lengthen the duration on their investment securities portfolio.

The recovery in business loans suggests that the credit appetite of businesses are still sound. In a low interest rate environment, we still expect non-interest income to drive Singapore banks’ earnings.

What You Should Do
We maintain Neutral on Singapore banks. Key near-term headwinds are sequentially lower treasury earnings as regulatory constraints from the SIBOR scandal and the bond selldown in Jun make it difficult for banks to deliver trading profits in 2Q13.

DBS is our sector top pick due to its relatively cheap P/BV valuations and delivery in various non-interest income streams.