Singapore Banks: Bank on resilience

- 2010 earnings reflect a strong 30% recovery.

- Recent property measures unlikely to hit banks directly as yet. Loan applications will be affected.

- 2011 earnings to grow at 10%. Upside potential to our 2011 loan growth of 8%.

- Still positive on Singapore banks. Valuations remain undemanding in the regional context.

30% earnings growth for 2010. We expect Singapore banks to end the year modestly with earnings growth of 1% q-o-q and 30% y-o-y, driven by sustainable non-interest income and lower provisions. Nevertheless, we expect a 2.0-2.5% loan growth in 4Q10 to help mitigate NIM pressure.

Recent property measures unlikely to hit banks directly as yet. Property transaction volumes are expected to slow down with the recent measures to cool speculative demand for the private housing sector. Recent checks reveal that mortgage LTV by banks are between 60-65% while mortgage loan exposure (mortgage loans to total loans) for the banks range between 25-29% as at 3Q10. The recent measures appear punitive on the private housing front, but remain palatable for first time HDB buyers and those with only one mortgage outstanding. While loan applications are expected to decline, we believe there is sufficient mortgage loan drawdown to support mortgage loan growth over the next few quarters.

Reiterate positive note on Singapore banks. Although Singapore banks have begun to perform, valuations are still undemanding in the regional context. NIM is still expected to remain tight but decent loan growth volumes at a base level of 8% for 2011 provides at least a 9% topline growth. We forecast earnings growth of 10% in 2011. Upside catalysts could come from positive surprises in loan growth and an earlier than expected uptick in SIBOR.

Still prefer OCBC to UOB. While OCBC is still our preferred pick, UOB will play catch up in terms of aggressiveness and growth in 2011. In terms of earnings growth, we still expect OCBC to outpace UOB given its strength in non-interest income particularly from insurance and wealth management. While we believe UOB's valuations will converge towards OCBC's, the gap is likely to still persist as UOB lacks a clear non-interest income catalyst.

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