UOB was the best performing index constituent last month, contributing to 36% of the STI’s upside movement. UOB gained approximately 3.7% during the month of May, closing at $22.70 yesterday, it is currently trading 3.6% above its 50-day moving average price of $21.92.
 
Macquarie Equities Research (MER) has issued a report on Singapore banks yesterday (2 June). Here are some excerpts from the report.
 
The MAS released loan and deposit growth data for Singapore for April 2014. Total system loan growth in Singapore slowed to 17.4% YoY (0.7% MoM) in April vs 19.7% YoY (1.7% MoM) in December 2013.
 
The three key points are that (i) trade finance loans declined MoM (i) YTD volumes of credit card balances are declining, (ii) mortgage loan growth is holding up better than expected due to slower repayments.
 
Impact
General Commerce loans – a good proxy for Trade Finance loans - contracted -0.3% MoM, marking the second MoM contraction in four months. The YTD growth rate in trade finance loans of 4.4% looks still good but the MoM contraction is a point to keep monitoring, in MER’s view. Transaction Banking (Trade Finance & Cash Management) contributes around 20%, 18% and 15% to pre-provision earnings for StanChart, DBS and HSBC respectively.
 
Credit card balances are down by 3.8% YTD after a peak in volumes in Dec 2013. In MER’s view this is a result of sustained lower borrowing due to Total Debt Servicing Ratio (TDSR) introduced by the MAS in June 2013. For consumer asst quality the TDSR is a positive in MER’s view given market concerns about an overleveraged consumer. However, the TDSR measures have also decreased system deposits, in MER’s view, as consumers use their deposits (mainly fixed deposits) to pay down their credit card loans and loans for vehicle purchases. This leads to potential deposits pricing competition, and lower credit card fees. System deposit growth was only 0.3% YTD which resulted into a further increase in the LDR (the ratio is inflated due to offshore loans booked in Singapore) to 109.4% in April from 107.9% in March.
 
Repayment of Mortgage loans have likely slowed down further since the peak in 1Q13. In MER’s view, this is the main reason for the healthy 7.3% YoY (0.4% MoM) growth in Singapore mortgages. DBS had previously shared that the slowdown in repayment and a faster drawdown of loans led to better than expected mortgage loans growth. The faster drawdown of loans was due to more housing projects reaching their percentage-of-completion milestone (which is a timing issue) and not due to a change in consumer behaviour. Moving ahead, the slower repayment will keep mortgages loan growth in Singapore for the three Singapore banks in the mid- to high single digit levels despite the significant decrease in loan application since 2013 in MER’s view.
 
Outlook
While not evident in 1Q14, slower domestic loan growth may be more visible for the Singapore banks for the rest of the year. However, pockets of growth opportunities remain and MER thinks the high single digit growth guidance by the banks is achievable. On a regional sector basis, MER remains overweight the Singapore banks, with UOB as their top pick.

Source: Macquarie Research - 3 Jun 2014