DBS Group Holdings made a new all time high of $35 on Jan 10, albeit briefly. Year-to-date, the local banking behemoth is up 6.59%. Oversea-Chinese Banking Corp has rallied 5.96% since the start of the year, but at $12 (give or take), it is not at an all time high. Back in 2018, OCBC traded above $13.73. United Overseas Bank is up 7.95% since the start of the year. UOB has been ahead on various digital aspects, such as launching its digital bank UOB TMRW across Asean. It has also not written back any of its expected credit loss (ECL) 1 and 2 provisions leaving mutiple avenues to boost earnings.
All three local banks are likely to be beneficiaries of interest rate hikes which are set to take off this year, in an effort to stymie inflationary pressures. On Jan 5, the US Federal Reserve’s meeting minutes (the FOMC was held on Dec 13-14) pointed to a faster-than-expected rise in US interest rates due to concerns about persistent inflation. The guidance is for three rate hikes this year. The flow through is usually around 60% to 70% in terms of impact on Singapore’s interest rates, which are moving to Sora.
In a research note published on Jan 5, Macquarie Research (MQ) gave a summary of their views of how Singapore banks will perform as the rate cycle plays out. MQ is expectiing US rate hikes to start from 2Q2022. Some US economists are expecting a first rate hike in March. As a result of the increasingly hawkish outlook, MQ has upgraded Singapore banks’ earnings estimates by 0.4% to 4.7% for FY2022 and FY2023. Its top pick is UOB followed by DBS which is most sensitive to rate hikes.
“The Singapore banks have an average 6bps positive impact on Net Interest Margins (NIM), MQ estimates, over 12 months, in response to each 25bps US$ 3-month rate increase,” MQ says in its update.
“Analysing tightening cycles over the past 20 years, on average, around 40% of the share-price performance was delivered as the yield curve steepened (ahead of the Fed), 40% during the period the Fed is hiking rates and 20% during the period when the banks report higher NIMs,” MQ says. The key variables to watch this time are the CPI normalising into 4Q2022 and China’s growth (important for the region) which needs to be above 5.0%, MQ adds.
Meanwhile recent property cooling measures could temper retail loan growth assumptions which would transtlate into a 4% to 4.5% growth compared a previous forecast of 5% growth for 2022. MQ reckons.
Citi is raising its forecast for DBS by 12% on higher NIMs. DBS has guided that 100bps in US interest rate hikes could add $2 billion to net interest income. ”The bulk of the NIM sensitivity is in SGD as DBS enjoyed a sector leading SGD CASA ratio of 94% (Jun-21), with healthy CASA ratios in HKD (77%) and USD (65%),” Citi says in its update.
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“We took a blended sensitivity to the US dollar rate, with some modelling assumptions around how other interest rates are correlated and how much CASA could convert to fixed deposits. In the past we guided to $14 million per basis point, with the impact spread over a few years. But with the profile we have today, we find that the bulk of the $18 million-20 million crystallises within the first year. So, if we see a 100 basis point US dollar rate hike, we are talking about a $2 billion increase in net interest income, the bulk of which will be in the first year,” Citi explains, referring to its DBS forecast.
Citi has raised UOB’s earnings forecasts by 6%-11% on higher NIMs. UOB has guided that 25bps move in short-term rates may change NIMs by 3-4bps.
“UOB’s NIMs are sensitive to rising rates with around 65% of group loans denominated in SGD/USD. The bulk of the NIM sensitivity is in SGD where UOB has less than 60% SGD CASA ratio, with a group CASA ratio of around 56%. UOB previously guided NIM sensitivity on a blended basis, whereby a 25bp movement in short-term rates could move NIM by 3-4bps. By currencies, SGD is likely to contribute around half, the rest from the non-USD book. For USD, the combination of modest CASA mix and shorter-duration assets means a proportionately lower contribution in a rising interest rate backdrop,” Citi elaborates.
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Earnings at OCBC could be as much as 12% higher than Citi’s original forecast on higher NIMs, the US bank says. OCBC has previously guided that 100bps change in interest rates could imply some $800 million impact to net interest income. “OCBC’s NIMs are sensitive to rising rates with 72% of group loans denominated in SGD/USD/HKD. The bulk of the NIM sensitivity is in SGD where OCBC has a 78% SGD CASA ratio, with a group CASA ratio of 63%,” Citi says.
These forecasts are based on inflationary pressures, but with inflation remaining benign. “A little inflation is helpful; too much can harm,” MQ says. “One common concern among investors is if rising inflation will erode purchasing power and negate the improving asset quality trend. A study by ratings agency Fitch on US banks’ performance over 37 years concluded a CPI between 1%-3% was optimal for loan losses and banking return on assets (ROA), with a CPI of more than 4% lifting loan losses, MQ points out.
