Industry DBU loans slowed to 13.0% YoY in May, supported by business loan growth of 17.4%. But housing loan growth hovered at a seven-year low of 7.6%.

Industry SGD deposits shrank 0.7% YoY, its first contraction since Mar 2003. SGD loan-to-deposit ratio continued to climb but still at a comfortable 86.9% in May

Maintain Overweight on Singapore banks with DBS our top sector pick. Shun OCBC given the uncertainty over its proposed bid for Wing Hang Bank.

May loan data supported by business loans

Business loan growth of 17.4% YoY in May continued to be the main pillar of support for industry domestic banking unit (DBU) loans (+13.0%) for the month. General commerce loans (+25.2% YoY) remained the key business loan driver. However, the general trend was dampened by a persistently weak housing loan growth of 7.6%, its slowest in almost seven years.

SGD LDR inching up but still comfortable

The industry SGD deposits shrank by 0.7% YoY in May, its first contraction since Mar 2003. The current depressed interest rates make holding cash unappealing. Although the SGD loan-to-deposit ratio (LDR) has been inching up, we are still comfortable with May’s figure of 86.9%. With deposit growth expected to remain lethargic, SGD LDR looks set to rise further in 2014.

We expect industry loan growth to slow to 9-10% in 2014-2015, with housing loans rising 4-6% in tandem with a slowing property market. However, we believe the shortfall would be compensated by a reasonably strong business loan growth of 12-14%. Lending to the general commerce sector could prove to be the wild card.

For exposure, DBS is our top sector pick as it is the best positioned to take advantage of a rising interest rate environment. We would stay cautious towards OCBC.  

Source: Maybank Kim Eng Research - 1 Jul 2014