Singapore’s loan growth slowdown may be more severe, warns analyst

Singapore banks, after recent falls, currently trade at ~1 standard deviation below historical P/B, and are unlikely to perform well in the short term. Since we downgraded the Singapore banking sector in mid Aug 2011, the three banks have recorded share price declines of between 5% and 9%. However, we do not believe banks’ share prices have bottomed, given the persistent macroeconomic issues in the US and EU, which could dampen loan expansion and raise concerns on asset quality.

The three banks are currently trading at close to one standard deviation below the historical P/B mean. During the SARS period (Mar/Apr 2003), the banks traded at close to two standard deviation below the historical mean. It was lower than three standard deviation below the historical mean during the worst of the Global Financial Crisis in Mar 2009.

Whilst it is still uncertain if we would witness a repeat of the earlier crises, we see no catalysts driving banks share prices in the short term. We maintain our NEUTRAL weight on banks, and factoring in heightened risks, are downgrading our target prices to ~ one standard deviation below the historical P/B mean.

Our top pick UOB’s share price has outperformed peers, and we expect upside – UOB TP S$19.53. UOB’s total return YTD outpaced its peers by falling 1%, sharply better than DBS’ negative 11% and OCBC’s negative 13%. Despite that, we expect further UOB share price outperformance. UOB’s conservative loan stance over the past 3 years (9.7% loan CAGR, versus DBS’12.5% and OCBC’s 15.6%) and greater focus on housing loans will help to keep its asset quality high, and hence provisions low.

UOB is also trading at a P/B ratio that is below -1 standard deviation, whereas the other peers are trading above. We see no catalyst driving DBS’ share price, as SIBOR is seen to remain soft till ~2013. OCBC’s current P/B is higher than its peers – which limits share price upside.

Loan growth slowdown may be more severe. Concerns on global economic growth will translate to weaker loan expansion going forward. Whilst we are already projecting FY12 loan growth of between 8% and 8.5%, which is sharply lower than FY11’s forecast of between 16% & 20%, there remains the risk of further downside, particularly for corporate loans. We are not revising our FY12 loan growth forecast now but will closely monitor developments.