Singapore Banks - Limited engines to fire


• Rate hikes may not translate to a significant NIM spike

• Earnings momentum to moderate in 2016 from lack of drivers; positive surprise could arise from lower-than-expected credit costs

• Asset quality largely stable; but expect higher credit costs as we reach the end of a benign credit cycle

OCBC remains our preferred pick

Muted NIM impact despite rate hikes
Expectations are rife for the first Fed rate hike in years - 25bps by mid-Dec and another 25bps in 1Q16. This should push SIBOR further up to 1.4% by 1Q16.

We have imputed slightly higher NIM in 2016 to account for the expected rate hike but we believe the NIM uptick may be muted as:
(1) we expect funding costs to catch up, dampening the impact of loan yield increases on NIM;

(2) in addition, with the S$ loan-to-deposit ratio now at a high of 87% from 79% two years ago, there may be little room left for banks to leverage on; and

(3) the wildcard on whether Singapore banks still carry surplus US$ liquidity may dampen overall asset yields and hence NIM.

Moderated earnings growth
If the excitement of the NIM spike for the Singapore banks cools off, there leaves hardly any drivers for growth in 2016. Judging from the trends we have seen in 2015, we believe that even with the Fed rate hikes, there is not much room for NIM to rise significantly. With loan growth likely stay in the low single digits, topline growth will be slower. Non-interest income is unlikely to excite as well and may be volatile depending on markets, and to some extent, be the wildcard to earnings. As we exit the benign credit cycle, credit costs will start to accelerate. We forecast 2016 earnings growth of 6%. Upside surprise could come from higher than expected NIM increase. Every 10bps increase in NIM translates to 4-7% rise in earnings. Elsewhere, there is little to worry about capital levels in our view, as Singapore banks are among the highest capitalised in the region.

Asset quality still relatively healthy
So far, an asset quality capitulation appears remote. But banks have been prudently setting aside additional provisions where required. Stress tests have been carried out on selected portfolios particularly the commodities and oil & gas sectors, but so far, there has been little stress. Stay watchful on unemployment trends; this would spell the change in asset quality direction should the labour market weaken.

OCBC remains our preferred pick
There will be little difference in the relative earnings performance of the Singapore banks in 2016 in our view as overall drivers are expected to be lacklustre. Differences in non-interest income potential and regional presence will be of focus. Our pick of OCBC over UOB still rests on the same reasons - better noninterest income franchise and healthier asset quality indicators with a larger Greater China presence. (Read Report)

Source : DBS Group Research

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