Singapore Banks

Kim Eng on 17 Jan 2013

Upside capped. Channel checks would suggest that banks expect an average 20% drop-off in new mortgage applications over the next six months from the recent property measures, but the overall impact to loan growth is likely to be felt only later on. Separately, there are several factors that are likely to moderate price competition and thus we think the impact on NIM is likely to be contained. Overall, however, these measures are likely to cap the upside to 2013 loan growth and NIMs. We maintain our Neutral call on the sector with DBS (BUY, TP: SGD17.40) as our top pick.

About 20% drop-off. Our channel checks point to expectations of a 20% drop-off in new mortgage applications over the next six months, though the impact on loan numbers is likely to be felt later on upon drawdown. In the meantime, we expect housing loan growth to continue tapering off (+16% YoY end-Nov 12), buffered by drawdowns on properties that are expected to be completed this year. Moreover, the local banks expect to benefit from reduced refinancing activity, which would stabilize their loan base. As such, any impact from these measures would likely be more apparent towards year end.

A manageable impact. Housing loans account for 31% of total DBU loans. Assuming new mortgage loan volume for 2013 comes in 30% lower than in 2012, we estimate an average 50bp reduction in overall loan growth for the three local banks from 8.8% to 8.3%, which would still be manageable, since every 100 bp decline in loan growth would impact the earnings of the banks by just 1.1-1.5%.

Unlikely to see aggressive pricing. As it stands, NIMs for mortgages remain under pressure, but mainly because of the substitution effect of older higher yielding loans with newer lower yielding ones. Positively, competition has eased in recent months - mortgage rates have ticked up by about 10 bps while banks have started to pull back subsidies. Coupled with rising loan/deposit ratios, we do not expect aggressive mortgage price wars despite shrinking sales. As such, Singapore NIMs are likely to be stable this year, with slight downward bias.

DBS least affected. DBS has the least exposure to housing loans - just 21% of its total loan book, as opposed to 26% for OCBC and 29% for UOB. DBS’ housing loan growth has essentially trailed its competitors’ since 4Q10. Housing loan growth moderated to about 8% YoY end-Sep 2012 for DBS vs 13% and 15% for UOB and OCBC respectively, ex-Malaysian housing loans. DBS is a BUY with a raised TP of SGD17.40 (from SGD16.10) on a higher 2013 P/BV of 1.3x (1.2x before), in line with peers, for a prospective 2013 ROE of 11.1%.