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Breakdown: Bank Credit Numbers And UOB
Breakdown, Tradeable | 02 April 2013
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By: Simeon Ang
Articles (125) Profile

The Monetary Authority of Singapore reported strong bank credit figures on the back of better than anticipated business loans. The republic’s central bank said that total loans from domestic banking units (DBU) grew 2.1 percent month-on-month to $510 billion in February 2013. February’s growth came in after the republic recorded a 1.8 percent growth in bank credit figures back in January 2013.

Corporate Versus Retail Loan Growth
Business loans grew 3.1 percent in February 2013 to $299.9 billion, hastening the pace of growth from 2.3 percent in January 2013. Compared with a year earlier, business loans grew 22.7 percent from February 2012.

As business loans typically reflect trade flows and business confidence, the rise could in essence, reflect growing optimism from business entities. This comes after some businesses may have deferred capital expenditures in 2012, fearing perhaps that the economic recovery in the United States might be uncertain.

However, retail loans to consumers grew at a slower pace of 0.6 percent compared with 1.1 percent in January 2013. This comes as housing and bridging loans, which forms the largest portion of retail loans, pared growth to 0.7 percent in February.

United Overseas Bank – Preferred Weapon Of Choice?
Amidst all this, local bank, United Overseas Bank (UOB) stands at the frontlines of the banking sector. Whilst the figures might offer a slightly mixed bag of growth, let us look at how analysts view this development as well as its possible impact on UOB.

Ken Ang of Phillip Capital was of the opinion that while domestic loan growth might be curtailed by domestic issues, demand for loans from the region is expected to be stronger. Further,

“With strong credit ratings and an increased presence, the Singapore Banks could possibly entice more (Multinational Corporations) in the (European Union) to place some deposits with them.”

If these multinationals do open more deposits with local banks, banks such as UOB could possibly see reduced pressures on its net interest margins as funding from such deposits are usually more cheap.

Ken maintains a NEUTRAL outlook on the local banking sector and a preference for UOB over DBS and OCBC.

Ken’s call: ACCUMULATE, with target price of $20.95 (potential upside of 4.2 percent*)

Expanding further on Net Interest Margins, NIM (a metric used by the banking sector to measure the net effects of receiving interest income from loans and paying out interest on deposits), Seng Choon of OSK Research mentioned in a research report that,

“Though NIM is expected to remain (low) in 1H13, we remain bullish on UOB as its larger loan share to Singapore housing mortgage (versus peers), and growth in overseas loans, should lead to wider NIMs with a lag of a few quarters.”

Seng Choon essentially feels that UOB’s loan portfolio growth can only be witnessed in the next few quarters. In addition, Seng Choon believes that UOB is currently trading at a discount to its historical prices, based on its price to book ratio.

Seng Choon’s call: BUY, with target price of $22.60 (potential upside of 12.4 percent*)

However, Carmen and Carey of OCBC Investment Research feel that recent curbs to the local property sector as well as car loans could in theory negatively affect the rate of growth of retail loans. They write,

“While recent property measures and Singapore’s (budget) announcements are likely to rein in mortgage and car loans, we expect slower Singapore GDP growth of one to three percent to have already been priced in.

While the retail sector could prove to be a rather challenging landscape for a bank like UOB, the corporate realm could be UOB’s boon as the bank continues to see strong growth from corporate banking in particular, wholesale banking.

Carmen and Carey’s call: BUY, with target price of $21.30 (potential upside of 6 percent*)

On the flip side of the coin, if UOB proves to be too expensive for you to digest, will you not consider another locally listed counter, Haw Par Corporation? Haw Par currently owns about 7.6 percent of UOB and its last closing price of $7.82 per share could prove to be a cheaper way to gain exposure to UOB.

*Based on UOB’s closing price of $20.10 on 1st April 2013

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Simeon, an LSE graduate, is currently the editor of Aspire. He specialises on topics surrounding trading psychology, politics and macroeconomics.

Please click here for more information about this author.

United Overseas Bank  26.390 -0.02 -0.08%   
Business: [FY18 Turnover] Group retail (43.3%), group wholesale (43.2%), global markets & investment management (5.1%), others (8.4%).

Insight: May-19, 1Q19 total income rose 7.8% to $2.4b due t... Read More

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