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Falling rates negative for Singapore's banks, positive for Indonesian banks: UOBKH

Jovi Ho
Jovi Ho • 7 min read
Falling rates negative for Singapore's banks, positive for Indonesian banks: UOBKH
UOBKH’s top pick in Singapore is Oversea-Chinese Banking Corporation (OCBC) with a target price of $16.85. Photo: Samuel Isaac Chua/The Edge Singapore
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UOB Kay Hian Research analysts are staying “overweight” on Asean’s banks, even as interest rates have peaked and entered a down-cycle. 

Indonesian banks, in particular, are the biggest beneficiaries of lower interest rates and have the highest earnings growth in 2024 and 2025, according to a Jan 15 UOBKH note. 

However, the interest rate down-cycle has a negative impact on Singapore banks, they add.

UOBKH’s top pick in Singapore is Oversea-Chinese Banking Corporation (OCBC) with a target price of $16.85.

Interest rates appear to have peaked with the US Federal Reserve keeping the Fed Funds Rate unchanged at 5.25% for the third consecutive time during the Federal Open Market Committee (FOMC) meeting on Dec 13, 2023. 

Based on the dot plot, the Fed Funds Rate is expected to ease 75 basis points (bps) in 2024 and 100 bps in 2025, write UOBKH’s analysts.

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Based on historical correlations, the three-month (3M) Singapore Overnight Rate Average (SORA) could ease 52 bps in 2024 and 69 bps in 2025. 

The interest rate down-cycle is facilitated by a decline in inflation as Covid-19 related supply-side distortions are normalised, add the analysts, and the interest rate down-cycle has a negative impact on Singapore banks. 

Thus, UOBKH is keeping “market weight” on Singapore’s banks, though it offers rich yields. “Rate cuts are expected to result in NIM compression and lower net interest income in 2H24 and 2025. Nevertheless, valuations are undemanding with Singapore banks trading at low P/B of 1.14x, low P/E of 8.4x and attractive dividend yield of 6.1% for 2024.”

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UOBKH forecasts DBS’s D05 -

net interest margin (NIM) to narrow 25 bps and net interest income to decline 8.0% in 2025. “We forecast an earnings decline of 5.2% in 2025. 2025 return on equity (ROE) is reduced by 3.7 percentage points (ppt) to 14.2% compared with its recent peak.”

UOBKH believes OCBC’s NIM will narrow 22 bps and net interest income to decline 5.9% in 2025. “We forecast an earnings decline of 4.1% in 2025. 2025 ROE is reduced by 1.7 ppt to 11.7% compared with its recent peak.”

UOBKH likes OCBC’s commitment to maintain dividend payout ratio at 50%, as well as its “consistent” earnings and its focus on trade and investment flows within Asean. 

OCBC also boasts a “defensively low” 2024F P/B of 1.06x, they add. “It has the highest common equity tier-1 (CET-1) of 14.8% and lowest non-performing loan (NPL) ratio of 1.0% as of September 2023.”


Meanwhile, loan growth is edging upwards in Malaysia. November 2023 loan growth accelerated to 4.9% y-o-y, up from 4.0% in the month prior, driven by stronger performance in the business segment, which grew by 3.5%, compared to 1.5% in October 2023.

Household loans remained stable at 5.8%, while the faster business loan expansion was fuelled by increased working capital and non-residential property lending. Household loans showed resilience across all sub-segments. 

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However, UOBKH attributes this growth to a low base effect, and they anticipate a tapering in December 2023 given the larger lending base in December 2022. “For 2024, we project a 6% sector earnings growth, indicating a recovery from -2% in 2023. The enhanced growth is attributed to a more stable NIM outlook and a slight recovery in loan growth, expected to range between 4.5% and 5.0%, compared to 2022's 4.0%-4.5%.”

Malaysia is lacking catalysts, say UOBKH analysts, and they stay “market weight” on the country’s banking sector. “We find current sector valuations fair considering the absence of new catalysts. NIM is predicted to remain flattish in 2024 coupled with only a modest recovery in loan growth.”

On the balance, sector dividend yields are attractive, surpassing 5%, and credit costs remain stable given the robust provision buffers in place, they add. 

Historically, banks with higher foreign shareholdings, such as CIMB, have outperformed the KL Finance index during periods of a strengthening Malaysian ringgit against the US dollar. UOBKH’s economists anticipate a gradual strengthening of the US dollar against the ringgit, reaching 4.55 by 2Q2024. “This is supported by an improvement in GDP growth to 4.6% in 2024 and the peaking interest rate cycle in the US.”

In Malaysia, UOBKH’s top sector pick is CIMB Group, followed by Public Bank. “Our preference for CIMB Group as the top pick is based on its high beta; its foreign shareholding, which is the highest among the banks; and strong ROE trajectory. “These factors position the stock favourably to capitalise on a growing risk-on investment environment in 2H2024 and foreign inflows into Malaysia’s equity market.”


Asset quality remains a key concern for Thailand’s banks in 1H2024. The Bank of Thailand (BOT) signalled that the current policy rate at 2.5% is in the neutral zone, encouraging moderate economic growth and not dragging the overall economic momentum growth. 

Current interest rates should be maintained until new shocks impact the current financial condition, write UOBKH analysts. 

Rate cuts instituted by the Fed in 2024 will not influence the central bank’s monetary policy stance, says UOBKH. Meanwhile, BOT has revised its GDP forecast from 2.8% to 2.4% for 2023 and from 4.4% to 3.8% for 2024 due to a softened tourism outlook and the absence of clarification on the implementation of the Digital Wallet Scheme. 

That said, the end of relaxed labels on distressed loans will trigger NPL inflows from 1Q2024 onwards, which remains the key headwind for the banking sector, says UOBKH. “We have already cautioned in advance against potential asset quality deterioration since 3Q2023. The upcoming 4Q2023 results could provide more data points on the magnitude of potential asset quality deterioration.”

UOBKH is staying “market weight” on Thailand’s banking sector. “We expect the sector’s earnings to grow 36% y-o-y but decline 11% q-o-q in 4Q2023. Rising NPL ratio and new NPL formation pose headwinds for the banking sector.”

For big banks, UOBKH think NIM will slightly decline q-o-q in 4Q2023. “Big banks have already repriced their lending rates, while funding will accelerate to catch up with lending yield. Big banks will benefit from policy rates remaining high in the near term.”

Conversely, the normalisation of policy rates lower will generate a potential bottoming out of NIMs for small banks in the medium to long term, they add.

UOBKH’s top pick is SCB X, given its goal to raise ROE to 13%-15% in the next three to five years, its intention to maintain its high dividend payout ratio and signs of improvement in asset quality. 


Finally, Indonesia will stand to benefit the most, say UOBKH analysts. “Based on data analysis from 2008-22, an interest rate down-cycle has a positive impact on Indonesian banks as their earnings tend to accelerate during and after rate cuts.”

Rate cuts could lead to NIM expansion as deposit rates are adjusted downwards faster than lending rates, stimulate loan demand and provide a better funding environment and lead to asset quality improvement on the back of domestic economic recovery.

Given that 70% of time deposits are 1-month and 3-month deposits, the impact of a 50 bps decline in 1-month and 3-month deposit rates could cut the cost of deposit by more than 13 bps, say UOBKH analysts. 

Among Indonesia’s four large banks, Bank Rakyat Indonesia (BBRI) benefits the most from rate cuts as its cost of funds is more sensitive to changes in interest rates than its loan yields due to its large base of fixed-rate loans, says UOBKH. 

However, BBRI is priced to perfection with 2024 P/B at 2.62x. 

Indonesia is the only recipient of an “overweight” call from UOBKH. “State-owned banks shine during interest rate down-cycles. Indonesian banks’ share prices movements are strongly correlated with macro expectations and interest rate movements.”

During times of lower interest rate and lower bond yield, state-owned banks usually outperform Bank Central Asia (BBCA), says UOBKH. “BBCA usually outperforms other big banks during times of macro uncertainty.”

BBNI showed an improved credit risk profile, which resulted in higher capital adequacy ratio, higher provision coverage and lower exposure to state-owned construction companies, says UOBKH.

“We foresee better earnings quality and a gradual recovery in ROE to the high-teens level. After successfully de-risking its balance sheet, the bank will focus on loan growth and digital initiatives this year. It plans to raise its dividend payout ratio from 40% to 50%.”

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