Bank loans growth hits the skids

[SINGAPORE] Bank loans growth is gradually weakening, as persistent economic uncertainty curbs business activity and banks themselves lend carefully.

Analysts expect loans growth for the year to slow to the low teens, significantly below last year's 30 per cent growth, but add that such a pace remains healthy.

Singapore-dollar loans to businesses and consumers grew 7.6 per cent over the first six months of this year, down from 16 per cent over the same period last year.

Preliminary data for June from the Monetary Authority of Singapore, shows that loans and advances from domestic banking units grew a slower 1.7 per cent over the month, after a 2.2 per cent spike in May thanks to a sharp rise in business lending.

But lending growth in year-on-year terms has been on a downward trend since December last year, one which extended into June.

Consumer and business loans from the banks stood at $452.57 billion as at June 30, growing 20.9 per cent from a year ago - the slowest pace in more than a year.

Economists see the loans growth slowdown so far as cyclical. DBS economist Irvin Seah, for instance, sees no sharp dislocation in bank lending unless a blow-up in the eurozone results in global recession.

Mizuho Corporate Bank economist Vishnu Varathan says: "The moderation till mid-year has been pretty light, though it is likely that a combination of supply and demand factors will bring down loans growth further in H2."

On the demand side, CIMB research head Kenneth Ng thinks companies are probably delaying expansion plans as economic uncertainty mounts.

Business loans growth slowed to 2 per cent over June, from 3.1 per cent in May. Compared to a year ago, business lending grew a smaller 25.4 per cent too.

Over the first six months of this year, loans to businesses rose 8.9 per cent, less than the 22.3 per cent rise over the same period last year.

This is in line with the slowdown in global trade, and is also partly due to last year's high-base, as China's strong demand for credit spilled over to Singapore, says Bank of America Merrill Lynch economist Chua Hak Bin.

Demand for trade finance loans from China has since faded, says Mr Ng. "This arbitrage trade played on the strengthening renminbi and weakening US dollar, a trend that stalled this year as risk aversion and flight to safety contributes to the US dollar's strength, making such trade finance loans less attractive," he says.

More corporate bond issuances also point to the fact that larger companies have alternative sources of funds. "Singapore corporates are taking advantage of the very accommodative funding conditions to tap the bond market, especially given the increasing investor appetite for yield enhancement," says OCBC economist Selena Ling.

Consumer loans have held up better. Growth picked up to 1.4 per cent over the month of June, from 1.1 per cent in May. Over the first half of this year, consumer loans grew 6.5 per cent, slightly slower than the 8 per cent growth over the same period in 2011.

Property sales continue to fuel the growth of housing loans, a major component of consumer lending which picked up to 1.4 per cent over June, and sped up to 15.2 per cent in year-on-year terms too.

"Labour markets and wage growth are still healthy, so people are still using their credit cards to spend," said Barclays economist Leong Wai Ho.

On the supply-side, banks' hesitation to lend could also be behind slowing loans growth. Mr Ng thinks it is the key factor.

With the uncertain economic climate, banks are likely to be more watchful of clients or sectors which could run into financial difficulties and tweak their exposure accordingly, he said.

Mr Leong too, says banks may have turned slightly more cautious and selective, compounding the impact of cautious businesses. "Banks could be tightening collateral standards and getting more prudent with loan-to-value ratios," adds Mr Varathan.

Loan growth may also be restrained by slowing deposit growth, says Dr Chua. In year-on-year terms, deposits growth has weakened all this year till June, when it rose slightly to 8.2 per cent.

Singapore's three local banks, due to report earnings in coming weeks, warned earlier this year that loan growth will slow to the low teens in 2012.

Phillips Securities Research banking analyst Ken Ang says that the three have remained careful, avoiding increased lending to troubled industries or borrowers. He expects overall loans to register low double-digit growth for the year, similar to Mr Ng's 12-15 per cent forecast.

Less optimistic is DMG & Partners analyst Leng Seng Choon, who expects loan growth to drop to 10 per cent. But in a spread reflective of macro uncertainty, other forecasters such as Mr Varathan and Mr Leong expect loan growth of about 20 per cent this year.

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