SINGAPORE (Apr 13): As the Monetary Authority of Singapore (MAS) has stepped in to support the local banking sector, Phillip Securities continues to be “overweight” on Singapore banks.

This is because the local banks will be “partially relieved of their burden” placed on the financial system, which has been impacted by the novel coronavirus (Covid-19) pandemic.

The brokerage points out that the risk sharing by the government will allow banks to mitigate risks to asset quality, it adds.

This is despite the short-term impact on liquidity as loan repayments get deferred.

Moreover, the availability of low-cost funds by the government will allow banks to have the ability to support loans income over the long-term once the pandemic comes to pass.

“Local banks will benefit from the slew of measures introduced by the government to reduce the strain on the financial system,” Phillip Securities analyst Tay Wee Kuang writes in a note dated April 13.

That aside, the slower-than-expected compression in net interest margin (NIM) will support the local banking sector, albeit temporarily.

This comes after the US Federal Reserve cut the Fed fund rates by 150 basis points (bps) last month.

According to Phillip Securities, local interest rates have so far shown “signs of resilience” to the drop.

In particular, the three-month Singapore Interbank Offered Rate (SIBOR) fell 73 bps, while the three-month swap offer rate (SOR) plunged more than 120 bps from the February peaks.

Phillip Securities notes that the lag effect of NIM compression means that the full impact of the drop in interest rates should only be experienced in 2H2020.

As such, it expects full-year NIM across the three local banks to fall by mid-teens level, lower than previously expected of above 20 bps.

Meanwhile, loans growth has been holding steady.

The brokerage reckons that loans growth may be bolstered by the regulatory and supervisory adjustments by MAS to encourage and support lending activities by financial institutions.

It has forecast loans growth to come in at the higher end of its 2% to 3% forecast for the full year.