Banks

Banks: With market observers' bearish outlook on the Singapore property market, there are concerns that profitability for the banks may be crimped and housing non-performing loans (NPLs) may creep up. Drawing lessons from the past, Maybank-KE cited that when Singapore and ASEAN were buffeted by major economic setbacks, housing NPL ratios stayed below 5%. In the event housing NPL, currently at 0.5%, heads towards the worst-case scenario of 9.8% (OCBC's peak during the Asian financial crisis), UOB would be the most vulnerable with a 17.8% risk on earnings per share, followed by OCBC (-14% downside) and DBS (-13.9%). The house also cites that various safety nets have been in place since end-2009: i) Proactive steps have been taken by the authorities to curb property speculation, ii) Strong employment rates to reduce the chances of runaway housing NPLs, iii) Lower risk of aggressive price cuts given the relatively healthier balance sheet of property developers, and iv) The potential increase in interest rates should be gradual and modest, providing sufficient time to work their way through the system. Overall, house expects the banking sector to escape largely unscathed from this housing-market slowdown. DBS (Buy, TP $23.40) remains as its top pick as it should be best positioned to benefit from rising rates, while remaining cautious on OCBC (Hold, TP $10.10). Maybank-KE has a Hold rating on UOB (TP $25.30).