Banks’ asset quality is as good as it gets: CIMB

And this is the key negative for Singapore’s banking sector.

According to CIMB, the sector is a Neutral, with an unchanged order of preference: DBS, UOB, OCBC. Banks are trading at the lower-ends of their valuation bands but justification for higher valuations is weak as ROEs are unlikely to beat 2011’s 11.0% with interest rates low and credit costs rising.

Here’s more from CIMB:

Credit costs as low as it can get
The key negative for the sector is that asset quality is as good as it gets. UOB had modest improvement to its NPL ratio, DBS was flat but OCBC’s NPL ratio started to trend up. Provisions are set to rise from here. OCBC’s and UOB’s credit costs inflated. Both pointed to pre-emptive provisioning on future bad credits or legacy exposure, as they prepare for a slowdown in 2012. None warned of any systemic deterioration, at this point. We think 4Q11 is likely to mark the quarter where credit costs bottomed. Rising provisions will act as earnings headwinds in 2012.

Margin guidance more encouraging
On a brighter note, margins were flat for two and unexpectedly, expanded 6bp for UOB. The banks are guiding that a tight liquidity environment, a pullback by competitors, provides an environment for better pricing. So far, the best opportunities to re-price are for large corporates’ US$ loans.

Gathering US$ deposits
The other positive for us was the Singapore banks’ ability to gather US$ deposits in this environment. DBS and UOB saw US$-deposits grow 18-19% qoq as corporate clients moved their working capital accounts from European banks to them. We agree with Wee Ee Cheong’s statement that liabilities are now an important asset for banks… particularly US$ assets.