Jun-07 stats: Loan growth back in action

􀂾 System loan growth repeated the Mar-07 momentum at
10.3% y-o-y and 3.8% q-o-q in Jun-07 after a brief slowdown in
May-07 (8.7% y-o-y and 2.7% q-o-q).
􀂾 Consumer loans, particularly housing loans, grew at its
strongest since Aug-05 at 6.9% y-o-y and 3.2% q-o-q in Jun-07.
Business loans grew at 14.5% y-o-y and 4.9% q-o-q after a
breather in May-07. Construction loans also improved y-o-y at
20.8%, but dipped on a q-o-q basis at 8.2% (May-07: 19.0% y-o-y
and 8.8% q-o-q).
􀂾 Deposits continued the momentum at 26% y-o-y and 5.2% qo-
q with significantly higher growth from demand and savings
deposits (low cost deposit). This would keep cost of funds for
banks low resulting in healthy NIMs. Meanwhile LD ratio was
higher at 68.3% in Jun-07.
Loans take off. The system’s domestic loans repeated its momentum at
10.3% y-o-y and 3.8% q-o-q in Jun-07 after a brief pause in May-07
(8.7% y-o-y and 2.7% q-o-q). Consumer loans grew their strongest since
mid-05, particularly housing loans, which is at its peak. Business loans
continued to dominate the system’s growth at 14.5% y-o-y and 4.9% qo-
q in Jun-07 after a breather in May-07.
Housing loans a winner. Housing loans grew their strongest since Aug-
05 at 6.9% y-o-y and 3.2% q-o-q in Jun-07. It appears quite evident the
influx of private residential activities is thriving - from bullish home sales
and expectations of en-bloc sales. We expect the momentum to
continue into 2H07. We believe all three domestic banks would benefit
but we expect UOB to show stronger housing loans growth.
Construction loans build up. Construction loans growth revived in Jun-
07 at 20.8% y-o-y, but dipped to 8.2% on a q-o-q basis (May-07: 19.0%
y-o-y and 8.8% q-o-q). We still think they will accelerate in view of
increased construction demand and hence flow through to the volume
of construction loans. Based on the latest financials available,
construction loan exposure (bank level to reflect domestic loans) ranks
DBS, OCBC and UOB in descending order (in terms of absolute value).
Higher low cost deposit growth. We note demand and savings deposits
outshined fixed deposit growth and we believe this could be a
deliberate strategy carried out by banks to offset the effects of lower
SIBOR to maintain NIMs. Despite flattish interest spreads, we believe
lower funding costs coupled with volume of loan growth would seal
healthy NIMs for banks.
Maintain Overweight. We believe there’s 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 sector pick is UOB (Buy, TP $27.50) for better growth
and ROE prospects. We also have a Buy rating for OCBC with target
price of $10.20. The sector has been a laggard and we would
recommend it as a late cycle proxy and alternative exposure to the
property boom. Maintain Overweight.