SINGAPORE (Sept 11): RHB says investors may have to temper their expectations that net interest margins is set to widen for all three Singapore banks.
Last week, both UOB and HSBC launched three-year fixed rate home loan packages, joining DBS which already has a package in place.
RHB says this is in response to recent market expectations of delays in the hiking of Fed funds rate (FFR) which should translate to a delayed increase in SIBOR.
“We believe this is a consequence of market doubts over further rate hikes by the US Federal Reserve, as 71% of market forecasters now see an unchanged FFR till the end of Jan 2018, and given the recent 1.1% appreciation in the EUR vs USD since the end of Aug 2017,” says analyst Leng Seng Choon in a Monday report.
As DBS is the key beneficiary of future rises in FFR, a delay would be negative for DBS, according to RHB’s analysis.
In addition, DBS has highlighted concerns relating to the possibility of further provisions for its oil & gas loan portfolio.
“DBS’ total return to shareholders of 21.7% YTD could be at risk, in our view,” adds Leng.
RHB prefers UOB on the back of its stronger balance sheet strength, high gross profit-to-loan ratio and high loan loss coverage.
UOB’s higher share of loans to the home mortgage space is another factor that could keep its asset quality high. In terms of loan breakdown for the three banks, UOB’s housing loan share of total loans is the highest at 27.6%, followed by OCBC’s 26.7%, and DBS’ 21.1%.
Leng also notices that UOB’s fixed mortgage loan rate of 1.68% remains higher than the current 3-month SIBOR of 1.12%, and is only marginally lower than the current 10-year SG sovereign bond yield of 1.94%.
While one can argue that mortgages offer low lending yields, the analyst says home mortgages’ NPL ratios are typically lower than business loans’, especially during periods of economic stress.
Shares in OCBC and DBS are trading 4 cents and 6 cents higher at $10.92 and $20.53 respectively while UOB is trading 7 cents lower at $23.43.
