If Singapore’s economy recovers as the pundits are forecasting, like Morgan Stanley which has raised its GDP growth to 5% y-o-y for 2010 and 2011, up from 4% and 4.5% respectively, then the best proxies to this recovery are the banks. In a report dated Jan 4, Thilan Wickramasinghe says banks will benefit from continued net interest margin growth and upside to fee income as macro-economic conditions improve. “The latest loan growth figures also point to positive momentum and this will strengthen as mortgage and SME credit demand flows through,” he adds.

Along with a stock market hitting new highs, demand for property should remain resilient. November loans expanded 2% y-o-y after a 0.2% contraction last October. “The key here were mortgages, which saw a 15.2% y-o-y increase; the highest pace of growth since March 2008,” notes Wickramasinghe. New property units sold rose 241% y-o-y in FY09 which translates to a rise of 127% in value terms. And as new developments are completed, he expects mortgage demand to continue to strengthen.
Separately, corporate credit saw a turnaround expanding 1% month-on-month after nearly a year of contraction. “With a 8.9% y-o-y GDP growth forecasted in FY10, we expect this momentum to strengthen as corporates and SMEs gear up for rising end-demand,” says CLSA. In past cycles, corporate credit has expanded on average by about 15% annually during periods of strong economic growth. This could translate into an 8% rise in loans according to Wickramasinghe. “Hence, our 7% y-o-y loan growth target is unchallenging,” he says.

A rising stock market could also be the driver for a steeper yield curve and hence gapping opportunities for banks as net interest margins are a function of gapping. “We forecast a 6 bps yoy increase here,” Wickramasinghe says. Clearly, loan- and trade-related fees will be key beneficiaries from rising loan growth and higher trade financing demand, especially from SMEs. Furthermore, as the market rises, there could be a revival in wealth management and fund management income.

In terms of capital, local banks are at a clear advantage. The Bank of International Settlements in Basle, which sets the standard for capital ratios, has put forward proposals to formalise global liquidity and gearing standards. As analysts see it, the banks here have the strongest ratios in Asia, with the highest loss absorption ratios in the region.

“With the sector already ahead vis-a-vis regional and global peers, we believe risks of incremental capital raisings will be minimal,” Wickramasinghe writes in his report.

Over at Nomura Research, Anand Pathmakanthan, Asean banks head, says Singapore banks are well positioned to meet the increased global regulatory standards. He says local banks are unlikely to need to raise additional capital and expects strong earnings growth from them this year.

United Overseas Bank (UOB), which has a total CAR (Capital Adequacy Ratio) of 18.5%, will see its core tier-one capital gain 40 bps from the sale of wholly-owned UOB Life Assurance to Prudential for $428 million, says CFO Lee Wai Fai. According to UOB, the unaudited net tangible asset value of UOB Life as at Sept 30, 2009 was $244 million and the book value of UOB’s investment was $343 million.

However, increased capital requirements for the trading positions of banks may see DBS Group Holdings having to set aside more capital, says Pathmakanthan.

Nomura has a “neutral” rating for DBS and “buy” recommendations for Oversea-Chinese Banking Corporation (OCBC) and UOB. CLSA’s top pick is DBS followed by UOB but has an “underperform” rating for OCBC.

Chart Watch
The STI broke out of the several-times tested 2,800 on Dec 22 (coincidentally on the winter solstice). It has been creeping up ever since, gaining 0.4% to 2,930.49 at the close today with stocks trading at 15.9 times estimated earnings, compared with about 10 times at the start of 2009, according to Bloomberg data.

Technically, the rising 50-day and 100-day moving averages are drawing apart after drawing together in December. This is a positive signal and suggests that the STI has further upside.

Analysts and strategists are forecasting levels of 3,200, which looks possible. Trader and chartist Daryl Guppy says that beyond 3,000, the next resistance area is 3,330 to 3,350, established by a trading band projection target.

Immediate support is at the breakout level of 2,800 and the best support line is the 50-day moving average, currently at 2,770.

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