Banking system loan growth in Feb-09 continued to moderate to 11.9% y-o-y as business loans grew at a slower pace at 15.2% y-o-y (Jan 09: 20.1% y-o-y).

Loans continued to contract on a q-o-q basis at 1.0%, albeit a smaller contraction compared with the previous month (Jan 09: -1.7% q-o-q). The reduction arose mainly from the business loans which contracted by 2.4% q-o-q and 0.6% m-o-m, also in a smaller quantum compared to Jan-09 (Jan-09: 3.9% q-o-q; 0.7% m-o-m). The smaller contraction on total loans and business loans is positive in our view. We believe that business loans growth could turnaround as banks disburse loans related to the government risk-sharing scheme.

Consumer loans remained stable, growing at 7.6% y-o-y (Jan 09: 7.7% y-o-y) while housing loans inched up to 8.6% y-o-y in Feb-09 (Jan 09: 8.5% y-o-y). Both monthly and quarterly housing loan growth remained in the positive territory. Housing loans performance may remain subdued for some time until the full impact of the deferred payment scheme comes into play.

Deposits growth slowed to 9.6% y-o-y in Feb 09 due to a contraction of fixed deposit accounts (-2.2% y-o-y). However, demand and savings deposits remain strong.

Positive catalyst – focus on m-o-m loan growth. A positive growth m-o-m rather than a contraction, would indicate that banks are more confident about the economy while investors may start to feel that investment returns are higher than borrowing rates, which would trigger the incentive to borrow. While the environment remains fragile, we think banks will continue to adopt a cautious stance and price loans based on risk. Nevertheless, we believe the government risk-sharing scheme will bear fruit and pose a positive impact on the banking sector.

We project a 6% loan growth for 2009, driven mainly by the business segment. We believe that the initiatives put forth during the recent budget would possibly provide some upside risk to our loan growth assumption.

Maintain Neutral on Singapore banks. No change in recommendations with preference for OCBC over UOB. OCBC remains our pick for its strong Tier-1 CAR at 14.9%, sustainable absolute dividends and minimal risk for equity call.