Find out why UOB stands out among the Singapore banks

It has the highest level of general provision reserves.

According to Nomura, with a large build-up in household debt in recent years, the government has put in place various macro-prudential measures in order to head off any potential financial crisis. The current LTV cap of 80% for the first mortgage has been in place for the past three years.

Here's more from Nomura:

This implies that UOB would be able to withstand a 25% correction in property prices after the first year of the mortgage, in our view.

Our property analyst Min Chow expects a large supply of residential units coming onto the market over the next 18 months and this could exert downward pressure on property prices.

UOB stands out among the Singapore banks, with the highest level of general provision reserves at 1.2% of total loans vs. OCBC and DBS at 0.9% each. This implies UOB is in a better position to absorb an increase in NPL formation.

We factor in a modest increase in credit costs to ~36bp by FY15F from 32bp in FY12 given: 1) LTVs of more than 80% account for less than 5% of total mortgages and 2) the relatively high level of general provision reserves which can be used as a buffer against rising NPLs.

We estimate Singapore-based mortgages currently account for around 22% of UOB’s total loans. Assuming that new mortgage bookings gradually fall to around half of 2012 levels over the next three years, we project housing loan growth could slow to 6% from 15% currently.

However, given the strong pipeline of sales booked over the past two years, FY13F mortgage growth is likely to be in double-digit territory, we estimate.

In a worst case scenario, where mortgage loan growth collapses to 5% next year, while other parts of the business maintain steady 8% growth, UOB’s loan growth for FY14F is  projected at 7.5%, which is 2pp lower than our current forecast of 9.3%, which could shave off around 1.8% from our net earnings estimates.