Deposit growth leads credit expansion. We surveyed economic cycles in the past 20 years and concluded that expansion in deposits typically leads expansion in loans, normally by 3-12 months. This happened in previous economic recoveries in the mid-80s, post-Asian financial crisis and post- SARS. As such, we expect current strong growth in deposits, a harbinger of a new credit cycle, to lead to stronger loans growth in 2010.
Loans growth a lagging indicator. Overall loans growth remains anaemic at 3.7% yoy. Growth is driven by loans to consumers. Housing loans expanded 1.5% mom and 7.5% yoy due to accelerated drawdown as more private residential projects received temporary occupation permit (TOP). Credit cards loans grew 4.2% mom and 7.1% yoy due to buoyant domestic spending during the Great Singapore Sale (GSS) in May and June. Loans to businesses lag economic recovery and increased only 1.8% yoy in Jun 09.
Strong growth in deposits reinforces our positive view on Singapore banks, indicating the start of a new credit cycle. Singapore banks face less competition as foreign banks retreat while an easing of the credit crunch provides positive industry dynamics. Systemic risk has reduced, paving the way for valuations to recover to pre-crisis levels.
We tentatively keep our earnings forecast unchanged because all three local banks will be announcing their 2Q09 results this week.
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