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Why investors should watch Singapore banks’ 4Q results closely
By PC Lee / theedgemarkets.com.sg | February 2, 2017 : 10:34 AM MYT
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SINGAPORE (Feb 2): The likely two or three interest rate increases expected in the US for 2017 will likely benefit Singapore banks given the positive impact on their net interest margins, agrees Lim & Tan Securities in its daily note this morning.
However, the higher interest rate environment has also hit asset quality badly with the percentage of exposures classified as doubtful and loss categories being currently at the highest level since the global financial crisis of 2008/2009, cautions the research team.
In addition, given the still tepid GDP growth of 1-2% expected in 2017, loans growth is also expected to remain low.
“With the three Singapore banks (DBS, OCBC and UOB) trading at about 1x book versus 10% ROE and yielding between 3.2-3.8%, we maintain our “hold” recommendation," says Lim & Tan.
OCBC will report its results on Feb 14, DBS will do so on Feb 16, and UOB will finish off the results season for the banks on Feb 17.
Analysts from at least two other houses are also sounding the same warning.
“Back to the future,” said UBS Investment Research analyst Aakash Rawat in a report, pointing to the recent rally that has been driven by expectations of higher rates.
“We remain sceptical of the impact of higher rates on banks in this stage of the credit cycle alongside falling physical property prices, high corporate leverage and a weak economy - just like it was the case in 2014.”
Others point to the tensions between rising rates and asset quality at a time of sluggish growth. Singapore’s GDP growth is among its weakest levels with estimated full year 2016 GDP growth of just 1.8%, noted Standard & Poor’s (S&P) analyst Ivan Tan.
S&P forecasts GDP growth to remain unchanged at 1.8% for 2017. Amid this, though, shares of the three banks have risen by 3-9% since the start of the year. “However, given the competition for lending to top-tier corporates amid excess liquidity, banks could face diffi culty in seeing higher customer loan spreads.”
In addition, the latest dip in business sentiment among small and medium enterprises (SMEs) suggests asset quality issues are far from over. This is even if the worst of the oil-and-gas sector is assumed to be behind the banks now.
The ongoing economic down cycle in a rising rate environment is likely to bring other sectors with weaknesses to the fore. In theory, a 100 basis point (bp) rise in rates can drive an approximate 1% return on equity (ROE) expansion, but in reality the resulting pressure on asset quality can create a bigger headache.
Analysts also point out that short-term rates -- off which most of the loan books make money -- have not moved much. The Swap Offer Rate (SOR), and the Singapore Interbank Offered Rate (Sibor) - are less sensitive to US rates today than in 2014 and 15.
S&P is forecasting two rate hikes of 25 bps each by end 2017, but this will be off set by muted loans growth, likely in the mid to low single digit range, as well as provisioning costs for rising non-performing loans (NPLs).
