Singapore Banks - Firm loan recovery in June on mortgages, back to end-08 levels

While Singapore system S$ loan growth in June continued to slow on a yoy basis, +4.2% vs May’s 5.5% and December-08’s 16.6%, it was positive to see Singapore system S$ loans recover to end-2008 levels for June loans’ sequential growth of +0.5% mom. Growth was largely driven by mortgages, +1.5% mom, on an improved property market with property transactions reaching record highs in June, as well as new loans for completed properties under the Deferred Payment Scheme. Broadly, corporate loans were flattish, -0.1% mom, despite a 2.6%/2.5% mom fall in manufacturing loans/non-bank financial institution loans. For the first time since early 2008 on yoy basis, manufacturing loans fell, -5.2%. Building & construction loans continued to contract at -0.3% mom, down since last April. SME loans fell 0.9% mom, despite continued take-up of new loans under Singapore government’s risk-sharing lending scheme - April: S$1.1bn, May: S$0.8bn, June: S$0.8 bn. Consumer loans remained the most resilient, continuing a positive sequential momentum throughout the downturn, June +1.5% mom. As with the previous 4 months, every consumer sub-segment saw growth except for car loans. Asian Currency Unit (ACU) loans also grew 0.6% mom, but are down 6.6% yoy.

System deposits grew 2.1% mom on broad growth across both CASA (+1.6% mom) and fixed deposits (+2.7% mom). Fixed deposit growth in June was surprisingly strong, for the first time since end-2008 it saw growth on a yoy basis (up 2.6%). We note 3M SIBOR has stayed at 0.69% since February. Loan-to-deposit fell to 73.1% vs. May’s 74.3% on stronger deposit growth. Upside risk to our loan growth forecast; staying positive With the loan recovery in June, system loans are back to end-2008 levels.

While our forecast is for loans to stay flat this year, the recent improved property market, which has been supportive of this year’s mortgage loans, could pose upside risk to our loan forecast. We are maintaining our forecast, pending further evidence of stronger mortgage loan growth momentum. We forecast mortgage loans to grow 5% in 2009E vs ytd 4.1%. We retain our positive stance on Singapore banks, key catalyst to watch is 2Q results, which we expect credit losses to positively surprise in an NPL-light cycle. Our top pick is DBS (DBSM.SI, Buy, Conv List). Key sector downside risks: prolonged global recession; larger-than-expected NPL/credit costs.

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