Decent industry DBU loan data. The industry domestic banking unit (DBU) loan growth was sustained in the region of 16% YoY in October. Business loans clocked strong growth of 19.4% YoY, which helped to compensate for a slower 10.4% YoY consumer loan growth. Come 2014, however, growth in business loans (59.9% of total DBU loans) is expected to slow down, led by the general commerce and building and construction sectors.

Housing loan growth continues to lose traction. The industry housing loan (29.8% of total) growth slowed to 11.9% YoY, the weakest in four years. The deceleration reflects a less robust property market and should continue well into 2014. Prospective growth will primarily come from loan drawdowns of new home completions (2014: 19,302 units; 2015: 18,278 units). System Singapore dollar LDR remains comfortable. The industry Singapore dollar deposit base has flattened out over the past eight months with 6.5% YoY growth, near its weakest in eight years. Low interest rates make holding cash unappealing. Stripping out non-Singapore dollar loans, the Singapore dollar loan-to-deposit ratio (LDR) remained at a comfortable level of 82.5%. We expect the current lethargic industry deposit growth to persist in 2014.

Rising rates to boost profitability. We project 3M Singapore dollar SIBOR to rise to 1.0% by end-2015 and to 2.0% by end-2016 (currently 0.4%). This supports our view that net interest margin (NIM) will continue to languish in 2014, before strengthening in 2015. The earnings upswing can be powerful after several years of depressed NIM and assuming that asset quality remains benign.

DBS is our top sector pick. Of the three Singapore banks under our coverage, we believe DBS is best positioned to take advantage of a rising interest rate environment, given its liquid balance sheet and strong deposit franchise with cheap funds accounting for 58.4% of total deposits. We have a BUY call on DBS with SGD19.70 TP, based on 14x FY14F core EPS, a slight premium to its rolling PER average since 2005.

Source: Maybank Kim Eng Research - 2 Dec 2013