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GOLDMAN Sachs expects loan growth for Singapore banks of between 6 and 8 per cent on a compound annual growth rate between 2006 and 2008 as domestic asset reflation starts translating into meaningful loan growth and regional lending activities are gathering momentum.

In a recent research report, Goldman Sachs said the asset reflation cycle has finally started translating into meaningful loan growth for banks in Singapore, with domestic banking unit loans growing 3.8 per cent quarter on quarter in Q2 after only 2.2 per cent cumulative growth over the previous five quarters.

Goldman Sachs projects compound annual growth rate in loans of 8.1 per cent for DBS Group, 7.5 per cent for United Overseas Bank (UOB) and 5.6 per cent for OCBC Bank over 2006 to 2008.

It sees a resilient building and construction loan growth outlook in Singapore and says UOB and DBS appear best placed to benefit from the nascent construction boom.

It notes UOB, which has the largest market share in this sector, appears most committed to the sector as it consistently grew its building and construction loans in 2004 when DBS and OCBC were cutting their exposure and in 2005 when the foreign banks were rushing for the exit.

Goldman Sachs sees mortgage growth in Singapore accelerating from 3.3 per cent in 2006 to 7.5 per cent in 2007.

It says a strong pipeline of completed residential projects over the next three years will drive mortgage growth. It also notes that the deferred payment scheme in which buyers pay the remaining 80 per cent of the purchase price upon completion and possession of the property has become popular.

Goldman Sachs sees UOB, DBS as prime beneficiaries of Singapore mortgage growth, given their strong market positions and a shift in borrowers' preference back to local banks from foreign ones.

The US house sees Singapore banks' significant excess capital and generally constructive capital management stance as supportive of their share prices but unlikely to drive future outperformance.

It notes that OCBC has the largest amount of excess capital of around $3.8 to $4.5 billion or 18 to 22 per cent of market capitalisation and says capital management by OCBC will provide some downside risk support against relatively lacklustre operating performance in the next six to 12 months.

Goldman Sachs says UOB has excess capital of $2.4-$3.4 billion but believes it will conserve capital for organic and inorganic growth in Indonesia.

As for DBS, Goldman Sachs estimates its excess capital to be around $2.1 to $3.5 billion, and notes that management is more likely to conserve capital for opportunistic acquisitions than returning it back to the shareholders.

Goldman Sachs says it is a good time to accumulate Singapore bank shares, which have been sold down from the peak in early May, especially its top pick DBS.