- Maintain Overweight; DBS still our top pick. We maintain our Overweight position on the Singapore banking sector, with unchanged target prices for the three banks, Outperforms for DBS and OCBC and Underperform for UOB. After OCBC's integration of Bank of Singapore (acquired last year) and notable efforts by DBS to ramp up its private-banking business, we take a closer look at the development of the private-banking business in Singapore. We believe wealth-management services will prove an important differentiator for Singapore banks in the years ahead. Benefits are manifold: 1) the business provides banks with a strong pool of sticky deposits; 2) fees could grow in a less-capital-intensive manner; 3) Singapore banks can expand the business beyond the constraints of geography; and 4) in the Asian context, Asian banks can become stickier with their key clients. DBS remains our top pick as it is the most sensitive to an eventual interest-rate rise and for its efforts to build up its Treasury & Markets, and private-banking businesses.
- Strong tailwinds for Singapore wealth-management industry. The greatest pools of wealth in the Asia-Pacific can be found in Japan and China but the regions where wealth is growing the fastest are Hong Kong, India and China. Singapore might not have the proximity to China like Hong Kong, but its advantages are its neutrality, and attraction to Indian HNWIs. Faster wealth accumulation in the Asia-Pacific was already a big plus for the private-banking business of Singapore banks before the crisis. This was aided by intrusive tax rules in the EU (2005-09) aimed at bringing taxable income from tax havens back home and increasing the taxable income base after the 2008 recession. Most recently, we heard that the recent MENA unrest has been diverting more Middle-Eastern private-banking monies from Europe to Singapore.
- Watch the space. Over the past two years, DBS and OCBC have made headline-grabbing inroads into private banking. They were not the only ones. Even as the likes of UBS have added headcount, there has been an influx of smaller boutiques setting up shop in Singapore. Even UOB recently mapped out plans to develop its wealth-management business, in parallel with its SME businesses. We expect wealth-management contributions to increasingly add to the investment proposition of Singapore banks.
Benefits of wealth-management franchise. Wealth-management product sales in 2H10 powered the earnings of two of the three banks. We believe wealth- management services will prove an important differentiator for Singapore banks in the years ahead. The benefits of wealth management are fourfold: 1) the business provides banks with a strong pool of sticky deposits, important as Basel III's liquidity ratio requirements are rolled out; 2) fees could grow in a less-capital-intensive manner; 3) Singapore banks can expand the business beyond the constraints of geography; and 4) in the Asian context, Asian banks can become stickier with their key clients. The tailwinds for this business are strong. We believe it will increasingly add to the attraction of investing in Singapore banks. OCBC's inroads here have been the most visible, after acquiring ING Asia Private Bank in Oct 09 for S$2bn, consolidating it and renaming it Bank of Singapore in Feb 10. Combined AUM was US$23bn at the time of consolidation; AUM had ballooned to US$32bn in 2010. DBS hired a high-profile banker, Ms Tan Su Shan, and has reformulated the strategy for its wealth-management business across the entire wealth spectrum. Even UOB has started to talk about wealth-management strategies. It may not target the uber-rich but would dedicate itself to serving SMEs in the region.
Strong tailwinds for Singapore wealth-management industry. Faster wealth accumulation wealth in the Asia-Pacific was already a plus for Asia's wealth-management hubs of Singapore and Hong Kong. These trends were further aided by intrusive tax rules in the EU (2005-09) aimed at bringing taxable income from tax havens home and increasing the taxable income base, after the 2008 recession.
Bipolar growth trends between the developed world and Asia also helped money flows into Asia. Artificially low interest rates, plus currency depreciation in the developed world, China's high interest rates and Rmb appreciation potential combined to form formidable catalysts for money flows. Such trends had already triggered a flood of money flows into Hong Kong. Chinese corporates sought cheap HK$ or US$ loans in Hong Kong, while Hong Kong residents sought to counter a falling currency and low interest rates by moving money into Rmb. As the Rmb gradually internationalises, the demand for synthetic Rmb bonds provided opportunities and the high composition of deposits held by the typical Asian millionaire provide the opportunities for intermediation. Most recently, we hear that the recent MENA unrest has been diverting more Middle-Eastern private banking monies from Europe to Singapore. Our channel checks suggest a growing influx of wealth from the Middle East, with possible flows into wealth-management AUM and property investments.
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