Singapore Banks: 1Q11 - Positive trends likely

- NIM pressure to ease in 1Q11, non-interest income remains crucial in sustaining bottomline.
- Potential surprises from loan growth
- Preference remains for OCBC over UOB

1Q11 results trend. While NIM remains on a downward trend in 1Q11, the quantum of decline would be much less compared to 4Q10. Among the banks, we expect UOB to show a steeper decline in NIM taking a view that UOB is more aggressive in growing deposits regionally. Noninterest income will remain a key feature. We think banks are likely to book some mark-to-market gains as bond yields have trended down during the quarter. OCBC's contribution from Great Eastern Holdings (GEH) should improve q-o-q. Provisions should remain benign while operating costs may see a slight uptick. All in, we project 4% q-o-q and 3% y-o-y earnings growth in 1Q11. Excluding UOB's one-off items in 1Q10 and 4Q10, 1Q11 earnings growth would be 13% q-o-q and 8% y-o-y.

Loan growth could surprise. The sterling loan growth rates of 16%/17% y-o-y in Jan/Feb this year and GDP growth forecast of 7% could potentially boost our estimates. We are expecting at least a 4% loan growth qo-q among the Singapore banks in 1Q11, driven by business/ corporate loans. YTD Feb-11 loan growth stood at 3.5%. While mortgage loan applications had dwindled in Jan/Feb, property transactions picked up strongly in Mar-11 indicating a potential surge in mortgage applications. Of all variables, we think loan growth could spring a potential surprise and this could add to top line growth.

Singapore banks remain our top Buy list. Singapore banks have lagged awaiting for rate hikes, but with the lowest downside risks vs. peers. We admit that earnings growth may not be exciting in 2011, but we are keeping Singapore banks as our top Buys as valuations remain cheap, asset quality is robust, capital is intact, and downside risk is the most limited vs ASEAN peers. Our preference remains with OCBC. We still prefer OCBC (Buy, TP S$11.30) to UOB (Buy, TP S$21.70) for better non-interest income traction and lower slippage in NIM. UOB will aggressively gear up its regional operations this year and may see further NIM pressure in 1H11.

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