Weekend Comment Jul 1: Strong loan growth for banks

LOCAL BANKS SAW their loans grow at 3.5% m-o-m, 8.7% q-o-q and 24.2% y-o-y in May. DBS Vickers analyst Lim Sue Lin called the growth “stunning”, as y-o-y rates are the highest in nearly three years. The loan-to-deposit ratio (LDR) is now at its highest since October 2008. Lending was driven by both property and business loans. Business loans expanded by 4.3% m-o-m while housing loans grew at a slightly softer rate of 1.4%. Even so, analysts say the numbers inspire confidence.

“Despite attempts to talk down the local property market, it looks like there is still no shortage of buyers, backed by bankers who are more than happy to dole out property-related loans,” says CIMB economist Song Seng Wun. “Overall property-related lending accounted for almost 50% of the total loans outstanding. Elsewhere, we continue to see healthy demand from other businesses, reflecting confidence in the economy.”

The release of strong loan growth numbers are coming on the back of the announcement of new standards for Singapore banks. Earlier this week, the Monetary Authority of Singapore (MAS) said that local banks would be required to set aside capital at levels higher than the new standards under Basel III. MAS will require Singapore-incorporated banks to have a total capital adequacy ratio (CAR) of 10% from 1 Jan 2015. Including a capital conservation buffer that will be phased in, total CAR will reach 12.5% by January 2019. The three banks currently have total CARs of between 17.2% and 19.2%, well in excess of those requirements. So they have said that they are confident they will be able to meet the new standards.

 

With enough capital set aside, and no immediate need to raise more, the banks should be able to increase the size of their balance sheets. CIMB expects lending growth to peak at around 26%, the same growth rate peak achieved in 2008. “With the base effect, y-o-y growth rates could moderate steadily from Aug 2011 for loan growth to end the year at 20% to 22%. Slower, but strong,” says CIMB.

Meanwhile, BNP analyst Ng Wee Siang says business loans should continue to remain robust for the next three months given the strong syndicated loan pipeline. He points out that there have been a number of relatively-large syndicated loan deals in so far, among the largest for Olam International at US$1.3 billion ($1.6 billion) and Wilmar International at US$1.6 billion.

 

Also, given that interest rates are very low, margins should remain healthy. Lim of DBS estimates that every 1% increase in loans growth could lead to a 2% to 3% increase in earnings.

 

Analysts now expect the strong loan numbers to drive the share prices of the banks, with RBS analyst Trevor Kalcic going so far as to say that this may be “the catalyst that the sector has been waiting for”. Kalcic is positive on the banking sector, saying: “Strong loan growth (12.6% year-to-date and 30.1% annualised), a gradual shift to slightly higher-margin business lending and higher LDRs are all earnings positive for the Singapore banks.”

 

Judging from Bloomberg data, the preference now seems to be for DBS Group Holdings and Oversea-Chinese Banking Corp. BNP’s Ng says he likes OCBC for its well-executed corporate strategy and consistent delivery. Kalcic of RBS says he prefers DBS over OCBC for its valuation as DBS trades at 9.5 times his estimates for its FY2012 earnings while OCBC trades at 11 times.

 

Morgan Stanley cautions that if loan growth continues at this level, investors should begin to get concerned about the quality of loans being written. “However, we believe that loan growth lags nominal GDP growth and with this now slowing, we would expect the rate of loan growth to come off over the next few months,” the brokerage says.