No go loan zone: Loan growth to slow in second half 2011

Singapore banks recorded 2Q11 sequential loan expansion of between 7% and 10% won’t last for long.

According to DMG, management guidance of between mid-to-high teens FY11 loan growth suggests a slowing pace in 2H11.

Here’s more from DMG:

We are downgrading the banking sector to NEUTRAL (from OVERWEIGHT) on the back of increased economic uncertainties. Whilst the banks’ 2Q11 earnings were generally in line with expectations, and loan growth momentum was robust, management are guiding for slower loan expansion in 2H11. With SIBOR seen to remain soft till 2013 (previously we expected SIBOR to trend up by mid 2012), NIM widening will be delayed. Recent indications point to possible economic weakness in the US and EU, which could have an adverse effect on banks’ earnings.

The rebound in banks’ share prices over the past few days offer an opportunity for investors to reduce their exposure. Our best pick remains UOB (S$18.80/BUY/TP S$22.40). Despite its share price outperformance YTD versus peers, its renewed aggressive lending stance in recent few quarters can catalyst more share price upside.

At the same time, it has managed its risk exposure by focusing on low-risk housing loans. We downgrade OCBC (S$9.09/NEUTRAL/TP S$10.08) as we believe its valuation is rich, particularly if we use P/B as the valuation benchmark. For DBS (S$13.76/NEUTRAL/TP S$15.10), we do not see any key catalyst to drive share price higher – expectations of soft SIBOR till 2013 is a negative for DBS.

Strong 2Q11 loan growth, but seen to slow in 2H11. The three banks recorded 2Q11 sequential loan expansion of between 7% and 10%, which were above our expectations. NIM, however, continued to be under compression pressure. Management guidance of between mid-to-high teens FY11 loan growth suggests a slowing pace in 2H11. Instead of NIM widening becoming more apparent in 2012 (which was our original expectations), we now expect NIM to only widen marginally in 2012 on the back of a persistently soft SIBOR. Hence, we can only expect net interest income to grow more strongly in 2013.

Unexciting non-interest income. The sequential contraction in non-interest income reflects lower trading gains (for DBS), less profit from life assurance (for OCBC), and decline in gains from financial instruments measured at fair value (for UOB). We expect the volatile trading income to remain a feature in subsequent quarters.

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