SINGAPORE (July 17): UOB KayHian is maintaining its “neutral” rating on Singapore banks stocks which are currently trading at about 1.1 to 1.2x forward P/BV or slightly below the historical average.

Housing loans represent 31% of the system’s domestic banking unit (DBU) loans. Following the implementation of cooling measures since 2009-2013, mortgage growth has slowed from 16% y-o-y at end 2012 to 4% y-o-y now.

In a Monday report, analyst Ng Li Hiang says recent buoyancy in the Singapore property market augurs well for housing loans.

In assessing the impact of housing loans, Ng says loans could increase by $7-12 billion in its base case scenario of 24,500 units of private housing sales, raising housing loan growth by 4-6% y-o-y in 2017. This translates to an increase of 1-2% of system DBU loan growth in the same year.

Ng says the net increase in mortgages bears a strong correlation to private residential transactions. Using the ratio of net changes in DBU housing loans divided by the number of private residential transactions, the analyst says although net loan/transaction was stable at $500,000, the ratio has been declining since 2014.

“We believe that this is a reflection of lower property prices, smaller number of speculators and property investors who tend to prefer larger units, and real buyers opting for small housing units,” says Ng.

UOB conducted a linear scenario analysis using net loans/transaction and expected transacted volume of private housing units and executive condominiums (ECs) in FY17E.

Assuming $300,000-500,000 of net loans/transaction and 20,500-28,000 of housing units, UOB estimates that the system can stand to gain $6-14 billion of mortgage lending opportunities, with housing loan growth estimated to increase by 3-7% from $194 billion currently.

“This translates to 1-2% increase in system DBU loan growth. Given that margins for new housing loans are usually tight, at 1% above 3M SIBOR, we estimate that system’s pre-tax earnings could range from $60-140 million,” says Ng.

UOB is maintaining DBS as its preferred pick based on better capability to manage liability costs to drive pre-provision profits.

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