Singapore banks' annual provisioning expenses unlikely to decline until FY18

The banks' asset quality cycle has peaked.

Jefferies analysts recently met with HK-based investors. Discussion was mostly centered around banks. Developers, after the rally YTD, saw very few chasers while SREITs are unloved. Camp is spilt between reflation-believers and investors looking to underweight banks on stretched valuation and unexciting margin outlook. 

Here's more from Jefferies:

Investors debated on margin reflation hypothesis with believers expecting that local currency rates will follow US money market rates with a lag, which in turn will be beneficial for Singapore banks' margins. Historically that has been the trend.

On the other hand, there are investors who concur with our view that with weak domestic private consumption, lower annual job growth than historical trend and still-high leverage, it is likely that domestic rates will stay low and uncorrelated to USD rates, amidst ample SGD liquidity. Further, with higher commodity costs, SGD depreciation stance against USD may be limited or else imported inflation will be amplified.

On balance, this group of investors hold the view that unless external growth permeates in Singapore, local rates will be capped. Unlike the split view on margins, there is broad agreement on asset quality outlook and its impact on share prices.

Asset quality issues are unlikely to be a share price driver unless new names emerge in O&G segment. While annual provisioning expenses are unlikely to decline until FY18, NPA formation from SME/retail exposures won't change the perception that asset quality cycle has peaked.

That said, one investor did raise concern on property-related NPLs. While it is a concern, in our view, regulators can ease property cooling measures which should cap any asset quality deterioration.