■ Our quantitative tests of Singapore banks’ NIM sensitivity to SIBOR largely validate conventional thinking that firmer rates tend to fatten NIMs.
■ Rising rates benefit NIMs through the repricing interval, risk premium & yield curve. In Singapore, repricing and risk premium have stronger influence. But as delinquencies accompany higher credit risks, the incremental income from NIM expansion may be attenuated by credit costs.
■ Cut sector rating to Underweight from Overweight. Downgrade DBS & OCBC to Sell. Downgrade UOB to Hold but our preferred exposure to the sector.
Dissecting NIMs: More Than Meets the Eye
Banks’ net interest margins (NIMs) essentially comprise two components: customer margins and interbank margins. In our quantitative analysis, we tested the sensitivity of their customer NIMs to repricing risks, credit risks and yield-curve risks from firmer interest rates. We tested their interbank NIMs against the spread between SIBOR and LIBOR.
Conclusion: banks’ asset-liability structures are sensitive to rate increases. Repricing assets/liabilities to a 50 bps rise in SIBOR would broaden group NIMs by 4.6-7.2 bps, ceteris paribus. And as credit spreads are volatile, NIMs could widen more if rate increases are driven by the risk premium ie an expansion of the credit-risk spread. For every 50 bps, NIMs could be widen 3.4-6.6 bps. But higher delinquencies could dilute any positive EPS impact.
Debunking the Myth: Is DBS the Biggest Beneficiary?
Contrary to market expectations, DBS may not be the biggest beneficiary of a rate hike in uncertain economic times. Rather we believe it to be UOB. We downgrade our sector rating to Underweight from Overweight. On this set of findings, we are reordering our recommendations. DBS and OCBC have been downgraded to SELLs from BUYs. UOB remains a HOLD; it is our preferred exposure to the sector.
Important Corollary On Disintermediation
A relevant corollary from our tests is that Singapore banks are facing serious disintermediation pressures. The evidence? The gap between their group NIMs and customer NIMs has been narrowing, suggesting that the banks are lowering their credit spreads to customers. This shrinks their returns from financial intermediation and marks a structural change for the sector. We believe this should be priced into the sector’s long-term valuations. (Read Report)
Source : Maybank Kim Eng Research