SGD depreciation (vs. USD) has suddenly accelerated and SIBOR/SOR rates are on an accentuated uptick. Rising SIBOR is good for banks’ NIMs but we are not sure that this move can continue without US Fed fund rate hikes. Banks are beneficiaries as rates rise, but recent moves might be overhyped.
3M S$ SIBOR rates, previously frozen at 0.4% for the longest time, jumped to 0.64%. 3M SOR jumped from 0.4% at end-Dec, to 0.93%.
What We Think
Although rising interest rates are great for banks‟ margins, we would not be hasty to declare this as a start of big interest rates upturn yet. The academic theory that binds forex movements and interest rates together is interest rate parity (IRP). The theory states that appreciating currencies will tend to have lower relative interest rates and depreciating currencies, higher relative rates; or else, differences can be arbitraged away. The key word is relative. With the US Fed fund rates stuck at zero-bound, it is unlikely that SIBOR will gallop away. We see recent SIBOR and SOR movements are more forex flow-driven.
In the recent week, expectations of USD strength became accentuated because “Grexit” is killing the EUR, putting EUR in the same bear camp as the JPY; USD is thus the only currency for flows to move to. As expectations of USD strength takes hold, IRP is driving sell SGD, buy USD flows. S$ SOR, being the free-market rate set by all forex participants, is galloping away. S$ SIBOR is also moving up in a more measured way, being the rate set by the three local banks. As long as expectations of dollar appreciation remains high, S$ SIBOR will move higher. That move though is capped by US Fed fund rates still at zero-bound. If euro fears die down, the current period of dollar strength could pause and likewise, S$ SIBOR could also see a slight retreat.
What You Should Do
Rising interest rates is clearly one of our 2015 themes, driving our Singapore strategy „Buy banks, hotels and dollar plays‟. But, we think this surge in SIBOR is not the real deal. When Fed fund rates eventually hike, SIBOR will be pulled along, lending rates in Singapore will go up more sustainably and banks‟ NII will increase, partially offset by a rise in credit costs. Our top picks are OCBC (Wing Hang synergies showing up) and DBS (interest rate play). (Read Report)
Read Related Report
Idea Of The Day – We highlight they key points picked up by Business Times from DBS CEO Piyush Gupta’s presentation at a private client seminar:
Thursday, 8 January 2014
Thursday, 8 January 2014
- Lim & Tan Research
Source : CIMB Research