Banking – Singapore - Unexpected Boost From Real Estate
- The improved sentiment for the private residential market is positive for banks, although we see rising interest rates as a more dominant catalyst.
- In aggregate, housing loans and building & construction accounted for 40.2% of total loans for DBS, 43.5% for OCBC and 50.4% for UOB.
- Banks benefit from stabilisation in asset quality for housing loans.
- Maintain OVERWEIGHT. Our top pick is DBS due to its high-beta to rising interest rates, followed by OCBC.
- The government announced calibrated tweaks to some property cooling measures last Friday that came into effect on 11 Mar 17:
- Lowered SSD. Seller’s stamp duty (SSD) was reduced by 4ppt to 12%, 8% and 4% respectively for holding periods within one year, two years and three years. Home owners who have held their properties for more than three years do not have to pay SSD.
- Relaxed TDSR. Total debt servicing ratio (TDSR) is no longer applicable for mortgage equity withdrawal loans with loan-to-value ratio of 50% and below.
A welcome reprieve.
- The fine recalibration of SDD represents the first relaxation of demand-side cooling measures. The change in policy direction could engineer a bottoming of prices for private residential properties.
- Banks benefit from the recovery in sentiment for the private residential property market. In aggregate, housing loans and building & construction accounted for 40-50% of total loans for the three banks (DBS: 40.2%, OCBC: 43.5%, UOB: 50.4%).
- Industry-wide housing loans and building & construction grew moderately by 3.9% and 2.1% yoy respectively during Jan 17. OCBC and UOB have the largest exposure to housing loans at 27% of total loans on a group-wide basis. UOB also has the largest exposure to building & construction at 23% of total loans.
Competition heating up for housing loans.
- DBS and UOB have recently launched promotions for housing loans pegged to Fixed Deposit Home Loan Rate (FHR) at zero percent spread. These packages are targeted at projects under construction. Home owners benefit from zero percent spread for 3-4 years until the projects receive temporary occupation permit (TOP). For DBS’ promotional package, the interest rate is 0.6% during the construction phase and 1.6% after TOP.
- Housing loans pegged to FHR are very popular due to concerns over rising interest rates. These promotions were supposed to have ended. However, similar packages could re-surface should competition heat up again.
Easing of pressure on asset quality for housing loans.
- UOB’s NPLs for housing loans increased by S$38m or 12.6% qoq in 3Q16 due to deterioration in the high-end residential property market in Singapore.
- OCBC’s NPLs for housing loans increased by S$40m or 11% qoq in 4Q16 as the bank repossessed nine properties, some of which were high-end residential properties located at Sentosa Island.
- The easing of cooling measures would stabilise asset quality for housing loans. The industry-wide average LTV for housing loans is very healthy at 52.6% as of 3Q16.
Key catalyst for banks: Higher interest rates.
- FED chair Janet Yellen said that “further adjustment to FED funds rate would likely be appropriate” during a speech in early-March. She also warned that “the scaling back of accommodation will not be as slow as it was in 2015 and 2016”. The strong non-farm payroll of 235,000, driven by the construction, manufacturing and mining sectors, was released last Friday and further supports the case for monetary tightening. Thus, the probability of a hike in FED funds rate during the FOMC meeting on 14/15 March has risen to 92%.
- UOB Global Economics & Markets Research expects three interest rate hikes within 2017, bringing FED funds rate from current 0.5-0.75% to 1.5% by end-17. 3-month SIBOR is currently at 0.88%. UOB Global Economics & Markets Research forecasts 3- month SIBOR to reach 1.45% by end-17 (previous: 1.35%).
- We believe rising interest rates is the most dominant catalyst driving gains in share prices for banks. Improvement in sentiment for the private residential market also provides a secondary boost.
- DBS and OCBC trade at 2017F P/B of 1.05x and 1.06x, which are 22% and 36% respectively below long-term means of 1.34x and 1.66x. They also provide decent dividend yields of 3.1% and 3.7% respectively.
DBS Group Holdings (BUY/S$19.11/Target: S$21.50).
- Our target price of S$21.50 is based on 1.19x 2017F P/B, which is derived from the Gordon Growth Model (ROE: 9.4%, COE: 8.0% (Beta: 1.1x) and Growth: 0.5%).
Oversea-Chinese Banking Corp (BUY/S$9.61/Target: S$10.75).
- Our target price of S$10.75 is based on 1.19x 2017F P/B, which is derived from the Gordon Growth Model (ROE: 9.0%, COE: 7.75% (Beta: 1.05x) and Growth: 1.0%).
United Overseas Bank (NOT RATED/S$21.49).
- UOB has the largest aggregate exposure to housing loans and building & construction at 50.4% of total loans.
- Rising interest rates and bond yields.
- Easing of pressure on asset quality from the O&G sector.
- Decent 2017F dividend yield of 3.1% for DBS and 3.7% for OCBC.
- As mentioned above.
- Outbreak of trade war between China and the US.
- Further economic slowdown and political risks in regional countries.