PhillipCapital analyst Tay Wee Kuang has maintained his “neutral” recommendation on the Singapore banking sector. He has also maintained “accumulate” calls on all three banks – DBS Group Holdings, Oversea-Chinese Banking Corporation (OCBC), and United Overseas Bank (UOB) with target prices of $21, $8.92, and $20.40, respectively.

While the three-month Singapore Interbank Offered Rate (SIBOR) and three-month Singapore Swap Offer Rate (SOR) held steady in the third quarter at 0.41% and 0.21% respectively, reported net interest margins (NIM) in 2Q20 are at historical lows.

“We are not likely to see much more downside to NIMs in the subsequent quarters as banks actively monitor their margins through repricing and cycling off excess liquidity from the balance sheet,” says Tay.

In the month of July, loans growth improved slightly but remained negative for the second consecutive month at -0.3% y-o-y.

Business loans grew 1.48% y-o-y in July, with growth in business services (+21.7%), building and construction (+4.9%), transport, storage and communication (+3.6%), as well as financial institutions (+1.8%).

These were offset by weakness observed in agriculture, mining and quarrying (-23.4%), professionals and individuals (-8.9%), manufacturing (-4.6%), general commerce (-2.0%), and others (4.3%).

Consumer loans remained weak across the board at -3.13% y-o-y. Nevertheless, credit card loans increased 2% m-o-m, growing for a second straight quarter after shrinking for five consecutive months previously.

The report issued by credit ratings agency Fitch on August 31 that raised concerns of a potential downgrade from the AA- credit rating of all three banks should not be an issue.

“The rating watch negative (RNA) status has been issued since April, and the poorer economic conditions outlined in the report were in accordance with the guidance provided by the banks previously. As such, without any fundamental change in operating environment, we believe that the financial position of the banks remain healthy,” says Tay.

The securities business continues to see sustained growth in the third quarter with preliminary securities daily average value (SDAV) data indicating a 17% increase y-o-y to $1.39 billion in August.

Derivatives volumes remain volatile. Volumes for the top five equity index futures which makes up more than 95% of monthly equity index futures contract turnover fell by an average of 12% y-o-y in August after recording a 27% y-o-y increase in July.

“While interest rates will continue to weigh on NIMs, resumption of business activities will lift non-interest income. We remain of the view that the banks have entered a period of gradual recovery from the earnings hit observed in 2Q20,” he adds.

As at 10.26am, shares in DBS, OCBC, and UOB were trading at $20.48, $8.53, and $19.23.