The K-shaped nature of the Covid-19 recovery story has caused business confidence and loan demand to appear mixed across different industries, says Selena Ling, head of treasury research and strategy at OCBC Bank.
Her comments follow the “noticeable softness” in loan demand from several sectors such as manufacturing, transport, storage & communication and business services.
Total loans from the domestic banking unit – which captures lending in all currencies, but mainly reflects Singapore dollar lending – came in at $692.17 billion in April. This is up a slight 0.1% from the $691.23 billion logged in March, the Monetary Authority of Singapore (MAS) announced on May 31.
Business loans came in near flat at $427.69 billion in April after four months of steady growth.
This was even though loans to building and construction – the single largest business segment – rose by 0.3% m-o-m to $152.15 billion, reversing the 0.3% decline registered in the previous month.
Loans to the other sectors in the business segment were down, with disbursements to the business services segment seeing the worst decline of 5% to hit $10.92 billion.
Loans to the transport sector similarly slumped by 4.1% m-o-m to $24.70 billion, while loans to the manufacturing sector were down to $26.89 billion in April.
On a y-o-y basis, total business loans were down by 1.4%, making this its eighth consecutive month of contraction.
Economists at RHB’s Singapore research team expect growth in business loans to be uneven.
Momentum of loans to the manufacturing sector is slated to remain resilient amidst the pickup in external demand, while loans to building and construction transport storage and communications are expected to take a hit from the recent imposition of the tighter restriction measures, the economists. elaborate.
Meanwhile, consumer loans were up by 0.3% for the ninth consecutive month, thanks to a recovery in loan demand in the housing segment.
Housing loans – which accounts for three quarters of consumer lending, was up for the eighth straight month with a 0.4% increase to $204.65 billion.
Going forward, Ling reckons that “consumer loans may remain buoyant due to the resilient mortgage loans growth and hence should remain the key support for loan demand for now”.
The implementation of the Phase 2 (Heightened Alert) status from May 16 to June 13 poses the question of whether the positive sentiments in April can sustain into May and June, she mulls, failing which, the country may see a setback that is hopefully “temporary and mild”.
To this end, Ling’s full-year bank loan growth forecast remains modest at 0.3% y-o-y, even as the loan growth for the first four months of the year came in at -0.4% y-o-y.
“Given the relatively low base for May-December 2020, loan loans growth should sustain in positive on-year territory even if on-month momentum may falter a bit near-term with the recent tightening of restriction measures,” she explains.
Agreeing, RHB’s economists say that the bank lending growth for domestic and Asian currency units will remain on a steady incline in 2Q2021 on account of a low base.
“The current environment of low-interest rates should continue to influence the rise in the take up in consumer loans,” they add.
Against this backdrop, CGS-CIMB analysts Andrea Choong and Lim Siew Khee are overweight on the banking sector and are expecting a “speed bump in growth”.
They have thus kept “add” calls on DBS, UOB and OCBC at $32.64, $28.84 and $13.75 respectively.
Choong and Lim’s optimism on DBS comes as its key drivers of wealth and treasury income are expected to remain intact through the tighter movement restriction orders. This will “support robust net profit recovery,” they add.
Meanwhile, UOB is expected to have a relatively modest, albeit stable y-o-y growth in FY2021, mull Choong and Lim. This is as the bank’s approach to impairments “have been more measured compared with peers, over FY2020,” they explain.
OCBC on the other hand saw robust gains from Great Eastern as well as better treasury market performance in 1Q2021.
“Notwithstanding provision top-ups for residual O&G exposures, lower credit costs aided the earnings growth in 1Q2021,” explain Choong and Lim.
As at 2.50pm, shares in all three banks were down, with OCBC edging down by 23 cents or 1.83% to $12.33 and UOB also down by 23 cents or 0.87% to $26.08. DBS’ shares meanwhile was trading down 50 cents or 1.65% at $29.85.