SINGAPORE (March 14): UOB Kay Hian is keeping its “overweight” rating on the banking sector following minor tweaks to Singapore’s property cooling measures on Friday.
The government on March 10 announced a reduction of Seller’s Stamp Duties (SSD) and changes to the Total Debt Servicing Ratio (TDSR), as well as an alignment of stamp duties for transactions in residential properties through property-holding entities (PHEs).
While the tweaks were minor and expected to have a marginal impact, the surprise easing of property cooling measures lifted sentiment for the property market and sent property developer stocks soaring to the highest in more than 20 months.
Analysts say the changes were likely to be a pre-emptive measure to counter any sharp deterioration of the property market ahead of anticipated US Federal interest rate hikes.
According to UOB Global Economics & Markets Research, three interest rate hikes are expected in 2017.
As a result, the 3-month Singapore Interbank Offered Rate (SIBOR), which currently stands at 0.88%, is forecast to hit 1.45% by end-2017.
“The improved sentiment for the private residential market is positive for banks, although we see rising interest rates as a more dominant catalyst,” says UOB analyst Jonathan Koh in a Tuesday report. “In aggregate, housing loans and building & construction accounted for 40-50% of total loans for the three banks.”
According to Koh, industry-wide loans for housing grew 3.9% in January, while building & construction grew 2.1%. OCBC and UOB have the largest exposure to housing loans at 27% of total loans on a group-wide basis. For building & construction, UOB has the largest exposure at 23% of total loans.
In addition, the easing of property cooling measures could see a decline in the banks’ non-performing loans (NPLs) for housing loans.
“The easing of cooling measures would stabilise asset quality for housing loans. The industry-wide average LTV (Loan to Value) for housing loans is very healthy at 52.6% as of 3Q16,” says Koh.
Koh’s top pick for the sector is DBS, due to its “high-beta to rising interest rates”.
The brokerage is keeping its “buy” recommendation on DBS with a price target of S$21.50.
UOB Kay Hian also has a “buy” call on OCBC, with a price target of S$10.75.
As at 12.53pm, shares of DBS are trading 2 Singapore cents higher at S$19.13 and shares of OCBC are trading 1 Singapore cent higher at S$9.62.