Analysts have kept their “overweight” ratings on the Singapore banking sector, in light of rising US interest rates in March.
PhillipCapital analyst Glenn Thum is positive on banks due to the effects of the increase in interest rates, as the three-month Swap Offer Rate (SOR) rose 31 basis points (bps) m-o-m to 0.79% while the three-month Singapore Interbank Offered Rates (SIBOR) was up 20 bps m-o-m to 0.67%-- its highest in 22 months.
Moreover, the three-month SOR is 25 bps higher than its 1QFY2022 average of 0.54% and has improved by 47 bps y-o-y. The three-month SIBOR is 14 bps higher than its 1QFY2022 average of 0.53% and has improved by 23 bps y-o-y, notes Thum.
As a result, this has a ripple effect on loans growth not only domestically, but also at a regional level. This is observed with Hong Kong’s domestic loans growing by 1.55% y-o-y and 0.13% m-o-m in February. The y-o-y loans growth for February was a significant improvement from January’s negative loans growth of 6.42%, although the m-o-m loan growth for February was moderated down from January’s m-o-m loans growth of 0.81%.
In addition, Malaysia’s domestic loans growth was 4.72% y-o-y in February and 0.16% m-o-m in February, with this increase the highest recorded since Mar 2019.
However, there has been an increase in the volatility index (VIX) averaging 27.0 in Mar, up from 25.8 in Feb.
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The preliminary securities daily average value (SDAV) for March also dipped 6% y-o-y to $1.5 billion, amidst community Covid-19 cases falling gradually as well.
This has seen the top five equity index futures turnover experiencing an increase of 10.7% y-o-y in March to 18.3 million contracts mainly due to the higher trading volumes of its Financial Times Stock Exchange (FTSE) China A50 Index Futures and Nifty 50 Index Futures. Most notably, the FTSE China A50 Index Futures increased 56.5% m-o-m to 11.1 million and the Nikkei 225 Index Futures increased 36.6% m-o-m to 1.54 million.
The SDAV for 1QFY2022 is down 2.7% y-o-y.
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To this end, Thum says, “bank dividend yields are attractive with upside surprise due to excess capital ratios. Improving economic conditions and rising interest rates remain tailwinds for the banking sector. Singapore Exchange (SGX) is another beneficiary of higher interest rates.”
In addition to his “overweight” call, Thum has kept “accumulate” on both DBS Group Holdings and United Overseas Bank Limited (UOB) with target prices of $41.60 and $35.70 respectively.
He has also kept his “buy” recommendation on Oversea-Chinese Banking Corporation (OCBC) with a target price of $14.22.
The team at RHB Group Research has also pointed out that the rise in interest rates will benefit the Singapore banking sector. However, the increase will also bring about downsides such as increased volatility that would pose a potential headwind.
Furthermore, according to the Federal Open Market Committee (FOMC) dot plot, officials are expecting to raise the federal funds rate (FFR) six more times in 2022.
The median projections point to an FFR of 1.875% by end-2022, which follows the 25 bps increase to 0.50% on 16 Mar 2022, and 2.75% by end-2023. This suggests a total of seven rate hikes of 25 bps or a cumulative 175 bps.
The recent steepening of the US 10-year Treasury yield also points to growing expectations for a sharper 50 bps hike in the next FOMC meeting in early May.
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With regards to the pricing of rate hikes, Singapore’s benchmark interest rates, which are closely correlated to movements in the FFR, have risen since the start of this year. While excitement over the prospects of rising US interest rates sustained the rally in Singapore bank stocks into Jan-Feb 2022, the Russo-Ukrainian war has brought valuation multiples back to more decent levels.
Since January 2009, Singapore Banks’ P/BV multiples have risen twice above +1 standard deviation historical mean – in mid-2009 to end-2010 lifted mainly by robust GDP growth, and late-2017 to mid-2018 on rising interest rates.
“We believe Singapore Banks can grind higher in the months ahead on a rise in FFR and border reopening having a positive impact on economic activities,” writes the team. “We have pencilled in four rate hikes in our FY2022 earnings, which are slightly ahead of consensus for DBS and OCBC.”
With the aggressive rate hikes, Singapore’s benchmark rates stand to rise sharply in 2022, according to the FOMC dot plot, followed by a moderate increase in 2023, although the rates are likely to remain lower than levels seen in 2006-2007 says the team.
“We expect the higher interest rates to be well absorbed by the market, helped by the improving economic prospects within the region,” adds the team.
On the rate hikes’ effect on loan growth, the research team believes that Singapore banks are guiding for mid-single-digit loan growth in FY2022, moderating from the high single-digit increase in FY2021.
RHB’s top picks among all three Singapore banks are UOB and DBS. The team has kept their “buy” calls on both banks with target prices of $38.10 and $42.70, respectively. Meanwhile, OCBC Bank is also kept at “buy” with a $14.40 target price.
The banks have previously guided that every 25 bps rise in interest rates would lift their FY2022 net interest margin (NIM) by 7-8 bps for DBS, 4- 5 bps for OCBC and 3-4 bps for UOB. This would translate to an earnings uplift of 5% for DBS, and 3% for both OCBC and UOB, notes the team.
Some risks that the team has identified include worsening geopolitical tensions between Ukraine and Russia, sharply higher commodity prices and supply chain disruptions that would exacerbate global inflationary pressures and threaten the fragile economic recovery and a resurgence of the Covid-19 pandemic.
Finally, UOB Kay Hian analyst Jonathan Koh is positive on the Singapore banking sector as he sees the Fed's tighter monetary policy and higher interest rates as good for the banks. In his report, Koh is estimating that the next two rate hikes to be at 50 bps each.
In addition, the ongoing war in Ukraine will exacerbate higher inflation, which keeps bond yields higher for longer, says Koh.
Koh has given DBS and OCBC "buy" calls with target prices of $39.55 and $15.50 respectively.
As at 3.15pm, shares in DBS, OCBC and UOB are trading at $35.59, $12.29 and $31.87.
