We upgrade the banking sector to Overweight from Neutral
as we believe there’s potential for Singapore banks to
outperform the market, with stronger-than-expected loan
growth in 2H07. We’re projecting 2007 loan growth at 10% y-oy
and earnings to grow 18% y-o-y.
Loan growth momentum has been accelerating over March
and April 07 to the 10% mark y-o-y, and we expect such trends
to continue, particularly in housing and construction. Robust
construction activities and private residential sectors are a boon
to the banking sector.
UOB is our top pick for the sector (Buy, TP $27.50) for better
growth and ROE prospects. Compared to OCBC (Buy, TP $10.20),
it’s more likely to surprise on the upside for dividends and NIM
expansion.
Strong domestic factors underpin loan growth. We note that domestic
construction activities have been accelerating since last year, boosted by
a rebound in the private residential market. On a larger scale, mega
projects like the Integrated Resorts and higher public spending would
increase construction demand and hence flow through to the volume of
construction loans. Up to April 07, construction loans grew at a
stunning rate of 26.7% y-o-y. Separately, private residential activities
are thriving from bullish home sales and en-bloc sales are also expected
boost housing loans. For 1Q07, UOB showed a strong 16% y-o-y growth
in housing loans. Meanwhile, OCBC’s housing loan growth remained
flat, with expectations of further growth by 4Q07. OCBC however,
recorded a strong 38% y-o-y growth in construction loans compared to
UOB’s 5%.
Relative market share growing. Based on 2006 year end financials, we
note that UOB holds the largest loan market share at 21%, while
OCBC’s has 19%. We used the Singapore currency loans as a proxy for
our estimates. In terms of housing and construction loans, using bank
level industry-segmented loans, we note that OCBC holds a larger
market share of 29% compared to UOB’s 26% for construction loans.
OCBC’s market share for housing loans is higher at 27% due to its
dominance in HDB-based loans. While UOB’s housing loan market share
stood lower at 22%, we believe that with the pick-up in the private
housing and the tail end of the deferred payment scheme, UOB would
have strong momentum to show a boost in housing loan growth.
Upgrade sector to Overweight. We upgrade the banking sector to
Overweight from Neutral as we believe there is potential for Singapore
banks to outperform the market, with stronger-than-expected loan
growth in 2H07. While ROEs may remain flat, we expect overall
earnings growth of 18% y-o-y. Our top pick for the sector is UOB for
better growth and ROE prospects. While OCBC is expected to deliver a
set of good earnings, we feel its days of low provisions may be limited.
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