SINGAPORE (Nov 7): Maybank Kim Eng is maintaining its &ldquo negative&rdquo recommendation on Singapore banks, in anticipation of further asset quality deterioration, even as the local lenders have focused on revenue generation in 3QFY16.

Ng Li Hiang, Maybank Kim Eng&rsquo s analyst, noted that the three lenders had grown market share in domestic loans and sought out new sources of loan growth during the quarter amid falling customer spreads, while higher non-interest income and cost management arrested declining earnings.

DBS Group and Oversea-Chinese Banking Corporation posted a respective 24% and 25% increase in non-interest income, driven by wealth management fees and net trading income, which helped to mitigate the higher provisions and poor performance in its net interest income. United Overseas Bank&rsquo s non-interest income fell 5% from the gain on divestment of investment securities in 3QFY15.

All three banks reported higher provisions due to the rapid asset quality deterioration, particularly in the O& G sector.

Ng had earlier highlighted that &ldquo shrinking China&rsquo s trade loans from more attractive onshore borrowing rates would result in a retreat of capital back into Singapore or banks would have to find new sources of growth to fill the vacuum&rdquo .

Given UOB&rsquo s small China exposure compared with its peers, the bank was likely to be least affected. As such, for loans growth in constant currency terms, UOB had the strongest loan growth of 7%, compared with DBS&rsquo s 5% and OCBC&rsquo s 0%. &ldquo OCBC&rsquo s flat growth also underlies its more cautious stance in this landscape to enter new relationships with new clients,&rdquo said Ng in a note on Monday.

Maybank Kim Eng&rsquo s preferred stock is UOB, for which it has a &ldquo hold&rdquo rating, given its minimal exposure to the oil & gas sector and China.

Ng points out that system loans contracted 5% during the quarter, yet banks have been lending out faster at 4% to 5% compared to the system, and the bulk of them were for housing loans in Singapore. Housing loans grew by 6% to 10% compared with the 3% growth for the system, and Ng says he does not rule out the possibility that &ldquo banks may undercut each other in the pricing for housing loans&rdquo .

As it stands, customer spreads have already fallen across the board between 2.015% and 2.13% in 3QFY16. Ng believes the reduced spreads could be due to the lack of a repricing interval from lower rates, a heightened risk environment which is impacting credit spreads and risk premiums, or a higher loan volume that is being driven at the expense of lower loan pricing.

To be sure, while loans in Singapore have risen by 1% - 2% for DBS and OCBC, Ng also pointed out that the weakened economic prospects in Singapore have led to the banks seeking growth in other countries.

For 3QFY16, DBS&rsquo s lending to &ldquo Others&rdquo in the region rose 32% y-o-y and was &ldquo broad-based across geographies and industries&rdquo . At OCBC, lending to the &ldquo Rest of the World&rdquo rose 7% in a similar broad based fashion across different industries. For UOB, loans in &ldquo Others&rdquo region rose 16% due in part to the financial institutions lending in Australia.

Shares in DBS, UOB and OCBC are trading at $15.07, $18.48, and $8.48 on Monday.