Singapore Banks: Loan growth, QE2 expiry are further positives

Maintain Overweight; economic recovery, credit demand, and expiry of QE2 add to the positive of valuations. We believe Singapore banks will have a relatively buoyant 2011 as both loan volumes and margins could potentially surprise on the upside. We maintain our Overweight position on the banks, with DBS (Outperform, S$17.00) and OCBC (Outperform, S$11.04) as our preferred exposures. Positive data points for loan growth and an anticipated change in the interest-rate climate add to Singapore banks' clearest positive – valuations.

Loan growth ahead of Street expectations. First, the Street is expecting 10-12% loan growth for 2011, but the latest data (+17.3%) shows still-healthy mortgage growth aided by broadening business loans. We believe loan volumes could surpass Street expectations for 1H11 and even if they slow down in 2H11, meeting full-year consensus should be easy.

Margins more likely to bottom by middle of the year. Second, the US Fed's QE2 expires in June. With the US economy now on a firmer footing, QE3 is not consensus now. Will this trigger changing interest-rate expectations? Inflation is, after all, an issue in Asia. In Singapore, robust credit growth has surpassed deposit growth. Loan-deposit ratios have risen to 76.1%, suggesting a gradual return of pricing power.

Feb 11 loan growth not just a positive data point on volumes. Singapore loan growth in Feb 11 was +17.3% yoy (Jan: +16.1%) and +1.6% mom (Jan: +1.9%). While housing remains a major driver, its importance is declining. Business loans are coming up to take their place. Meanwhile, deposit growth was only 11.9% yoy. This is the ninth month that deposit growth lagged loan growth. The pace differential had also widened. System LDR is now 76.1%, back to early 2009 levels. At such levels, liquidity is still ample though if such trends continue, banks might just attempt to gradually claw back pricing power.

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