Singapore banks’ loan growth jumped 20% in 5 months

We expect the YoY loan growth trend for Singapore banks to have held strong in 2Q11, which would lift management guidance and consensus expectations for the sector this year. DBS will be the first to report its results this Thursday, followed by OCBC on 4 August and UOB on 12 August. Positive variance could also come from lower‐ than‐expected loan provisions. We remain positive on the sector.

Our View
We reiterate our view that net interest margins will remain depressed until next year at the least, beyond what the market expects. The thin margins, however, will be compensated by the continued strong loan growth. As evidence, the figures for total Singapore system loans during January to May indicated a 20% YoY increase, as opposed to the banks’ earlier guidance of low mid‐teen growth for this year.

Provisioning‐wise, all three banks are well‐covered with allowances for more than 100% of NPLs. Singapore’s healthy economic outlook gives us reason to expect a smaller percentage of loan charge‐off or in the case of UOB, a write‐back perhaps. On the other hand, trading income and/or investment banking fees could disappoint, given the high base in 1Q11 and weak market conditions in 2Q11. DBS is the most at risk as it has a high proportion of income tied to this arena.

We anticipate a keen focus on regional growth initiatives, given that all three banks are doing well at home. We expect 2Q11 profit growth to be healthy YoY, but not on a QoQ basis. We forecast 2Q net profit of $719m for DBS, $618m for OCBC and $660m for UOB.

Action & Recommendation
The Monetary Authority of Singapore’s recent announcement on capital requirements has provided local banks with greater clarity on capital planning. It may also enable them to take a slightly more aggressive stance going forward. The enhanced ROE profile vis‐à‐vis international peers could be a positive catalyst going forward. We raise our profit estimates by about 1‐2% to take into account better loan growth.

Maintain BUY on OCBC and DBS, and HOLD on UOB. Our top pick remains OCBC for its better growth profile.