Banks did not have the best performance in August as the three local banks fell by an average of 5.5% in the month of August.

Among the three local banks, DBS saw its share price fall the most as it ended the month down 8.2%.

Should SG banks still feature in your portfolio given their poor performance in August? If the answer is yes, which of the SG banks should you be putting your money to?

Optimistic loan growth

In the last quarter, SG banks managed to grow loans portfolio by 6.0% to 11% year-on-year across countries and industries.

As Singapore heads towards an improved economic outlook, MBKE Research foresees more optimism on banks’ lending opportunities.

Singapore’s property market has also seen some recovery due to improved buyer sentiment, which gives rise to lending opportunities for the banks.

Wealth management will be a key driver

Wealth_ManagementSource: MBKE Research

MBKE Research believes that wealth management will be one of the prominent growth avenues for the banks as Asia Pacific becomes one of the fastest-growing regions for wealth management.

As such, MBKE Research foresees Singapore banks’ wealth management fees to be in double digit growth over FY17-18E.

O&G assets continue to be a drag

One of the biggest risks for the banking sector is the exposure to the O&G sector. MBKE Research believes that provisions for the O&G sector could increase as the O&G sector continues to suffer from a weak outlook.

The NPL ratio for O&G support services continues to be at elevated levels (15-23% as at 2Q17).

MBKE Research notes that lending activity within the O&G sector has been on a downtrend, reflecting banks’ reduced risk appetite.

So, which SG banks should be in your portfolio?

1. UOB: Pricing discipline and selective lending strategy a boon

Among the three local banks, MBKE Research is most positive on UOB. MBKE Research’s positive outlook on UOB stems from UOB’s ability to retain higher customer spreads. MBKE Research also likes UOB for its pricing discipline.

Another aspect that MBKE Research highlighted is UOB’s ‘selective-lending’ strategy.

UOB continues to maintain discipline in its pricing to ensure that there is no significant margin compression from high-quality customers. These customers tend to have lower lending rates due to lower credit risks.

In terms of its risk in the O&G sector, MBKE Research believes that UOB is ahead of the provisioning cycle through pre-emptive classifications.

That puts UOB in a relatively well-shielded position from any further deterioration in the O&G sector as compared to its peers.

MBKE Research: United Overseas Bank Limited (SGX: U11) – BUY; Target Price $26.40

2. DBS: Outlook for 2H17 appears dim

At the start of the month, DBS management guided that provisions for the O&G sector will continue to remain high due to DBS’ exposure to the O&G support services sector.

MBKE Research notes that specific provisions will be around $1 billion for FY17- 18E. MBKE Research opines that more restructuring among O&G support services company and the decline in collateral value of the vessels could require higher specific provisions.

MBKE Research foresees lending yields to come under “some compression in the coming months due to competition and the need to offer more attractive rates to gain market share”.

Although DBS is a key beneficiary of rising rates, the management has already guided for lower net interest margin in the coming months.

MBKE Research: DBS Group Holdings Limited (SGX: D05) – HOLD; Target Price $21.50

3. OCBC: Avoid as returns potential is limited

OCBC’s earnings momentum should continue into 2H17 as the contribution from wealth management fees and insurance grow in a risk-on market environment.

OCBC should also expect more opportunities to come from better economic prospects, led by the recoveries of trade growth and the Singapore property market.

However, MBKE Research warns that volatile market conditions can affect earnings given OCBC’s “greater reliance” on non-interest income.

Moreover, with the share price rising ~24% year-to-date (as at 4 Sep 11:10 am), MBKE Research opines that upside in share price could be capped.

MBKE Research: Oversea-Chinese Banking Corporation Limited (SGX: O39) – HOLD; Target Price $11.05