Singapore Banking Sector - Hold UOB, OCBC, Sell DBS

n the midst of the economic recession, Singapore system loans growth remained lackluster with total loans outstanding higher by 2.2% to S$271.8bn over the year. Business loans contracted 2.1%, as we believe lower economic activities caused many SMEs to reduce their short term financing. However, consumer loans managed to offset some of that contraction as it recorded resilient growth of 8.3%, boosted mainly from the housing loans.

We expect consumer loans segment to expand; especially the mortgage loans (70.3% of consumer loans, 31.0% of total loans) as the number of private properties transacted in Singapore remains elevated in 2009 despite the economic recession. Mortgage loans are usually disbursed over 3 years and thus provide a healthy loans pipeline for the Singapore banks.

However, we currently rate UOB and OCBC as HOLD and DBS as SELL. This is due to the recent run-up in the banks’ share prices and that the risk reward is not as attractive as before. UOB and OCBC are currently trading close to the 5 year average price to book ratio, whereas DBS is trading at a lower P/B valuation. The lower rating of DBS is due to the lower growth assumption, and lower ROE expectation relative to its listed competitors. Moreover, we believe that the increase in non-performing loans remains as a key risk shadowing the banking industry.

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