Singapore banks lauded for strong funding franchise

Thanks to rocketing household savings.

Tighter liquidity conditions, rising rate hike expectations and tougher regulations have highlighted the importance of funding for Singapore banks.

According to a research note from Barclays, Singapore banks have a strong funding franchise, benefiting from high household savings rates and their ability to tap cheap long-term stable wholesale funding given their strong credit ratings.

Tighter liquidity conditions are already evident in the recent rise in Singapore's interest rates.

Barclays believes margins will trend upwards as the loan-deposit spread widens, especially from 2H15 given the prospects for a rising US interest rate environment.

Here's more from Barclays:

The Singapore banks appear positively geared to rising interest rates and defensive to capital outflows and tighter liquidity, but we believe this is partially reflected in current valuations, after the 20% outperformance of the sector relative to the STI over the past two years.

We downgrade UOB to EW from OW on valuation grounds and upgrade OCBC to EW from UW. DBS (OW) remains our preferred pick. We transfer coverage of the Singapore banks to Sharnie Wong.

DBS remains our preferred pick; downgrade UOB to EW and upgrade OCBC to EW: The Singapore banks are well positioned to benefit from the higher rate environment, but this is already partially reflected in current valuations, with 18%-30% outperformance of DBS and UOB versus the STI and MSCI Asia-ex-Japan Bank Index over the past three years.

Given current valuations, we downgrade UOB to EW from OW although we slightly raise our PT by 2% to S$24.10. DBS (OW) remains our preferred pick and we raise our 12-month price target by 16% to S$22.

We believe DBS' rerating will continue as it is the most leveraged to rising rates, is well capitalised and its dividend payout may positively surprise. DBS's valuations are still undemanding at 1.28x FY15E P/B, a slight discount to peers.

We upgrade OCBC to EW from UW as we raise our PT by 7% to S$10.70. OCBC has underperformed DBS and UOB since 2011, but we believe its weaker capital position is now fully reflected in its share price.