Faced with muted earnings, Singapore banks are “biding time” as interest rates remain low by adjusting deposit rates to manage funding costs, says PhillipCapital analyst Tay Wee Kuang. 

“The outlook for the sector continues to brighten together with the Singapore economy. However, we believe the banks will follow through with their credit guidance for FY2021, which implies continued muted earnings,” writes Tay. 

“For sector exposure, we prefer SGX, which has delivered a strong set of 1HFY2021 results with positive contributions from newly-acquired businesses.”

In a Feb 4 note, Tay is maintaining “neutral” on the sector, with target prices $22.60 for DBS Group Holdings, $9.68 on Oversea-Chinese Banking Corporation (OCBC) and $21.10 for United Overseas Bank (UOB) Limited. 

In response to the low interest rate environment, OCBC is the latest to cut deposit rates, the fourth revision to its savings accounts in just nine months. 


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January’s 3M-SIBOR/3M-SOR of 0.40%/0.20% were 56 basis points lower than FY2020 levels, notes Tay. Current 3M-SOR has edged up 1 basis point from January to 0.21% and rates are comparable to the past quarter, he adds. 

On the SOR, Singapore will transition to a single-interest-rate benchmark, the Singapore Overnight Rate Average (SORA), by end-2021. SORA is a backward-looking overnight rate that is supposed to offer more stability than SIBOR/SOR, which are forward-looking and computed using US$ LIBOR. The latter had been found to have been manipulated by European and US banks.

SORA will replace SOR by 2021, beginning with the full transition of SOR-linked cash-market products by May this year. SORA is then expected to replace SIBOR by 2024. 

Net interest margins (NIMs) could come under pressure, says Tay, as the backward-looking SORA will remove the pricing premium for uncertainty for the forward-looking SIBOR/SOR. “However, we expect savings from asset repricing to offset NIM compression in FY2021.”

The decline on loans is slowing, notes PhillipCapital. Loans may have fallen 1.98% y-o-y in December, but this was an improvement from their decline of 2.32% a month ago, writes Tay. 

Business services and building and construction loans grew 5.7% and 5.3% y-o-y respectively. General commerce and credit-card loans fell 10.5% and 13.5% y-o-y respectively. 

Month-on-month, loans grew 0.3% for the second consecutive month. Both business and consumer loans improved, up 0.18% and 0.51% respectively. Business loan growth was spearheaded by financial institutions’ loans, says Tay, which grew 4.9% m-o-m. 

Credit cards led consumer loan growth, adding 1.7% m-o-m. Housing loans grew 0.4% m-o-m and 0.3% y-o-y. They are expected to provide runway for system loan growth in the next three to four years, with housing project completions underway as the construction sector resumes operations.

In a broader report on ASEAN banks, Maybank Kim Eng Research rates Singapore banks “overweight”, noting that positive momentum is likely to continue, buoyed by continued economic relaxing, targeted support for the vulnerable sectors and higher non-interest income due to market volatility. 

“Asset quality risks remain elevated, but continued relief measures may see it kicked further down the road. A relaxing of dividend caps in line with other OECD regulators could be a further upside catalyst,” notes Maybank KE.


SEE: DBS downgrades Riverstone Holdings to ‘hold’, other analysts still positive


Maybank KE also highlights that the Monetary Authority of Singapore allowed in March 2020 the deferment of principal or principal & interest payments for residential property loans until Dec 31. Subsequently, in April 2020, this facility was extended for commercial and industrial property loans as well as renovation and student loans.

At the same time, MAS allowed for the deferment of principal repayment for SMEs with secured loans until Dec 31. In October 2020, MAS further allowed for property loans to make reduced instalment up to 60% of the monthly instalment for nine months, but not exceeding Dec 31, 2021. 

Students and renovation loans can obtain loan tenure extensions of up to three years. Applications for these are till June 30, 2021. SMEs can defer up to 80% of principal repayments till June 30, 2021 for sectors most affected by Covid-19 and March 31, 2021 for those affected less. There are also loan restructuring schemes available.

As at 3.45pm, shares in DBS are trading 6 cents higher, or 0.24% up, at $25.30; while shares in OCBC are trading 5 cents higher, or 0.49% up, at $10.31; and shares in UOB are trading 12 cents higher, or 0.51% up, at $23.56.