SINGAPORE (Dec 2): Singapore banks could see weaker margins ahead from falling interest rates, but analysts say growth could be lifted by overall positive momentum.

According to latest data published by the Monetary Authority of Singapore (MAS), loan growth has moderated to 4.4% y-o-y in October.

“Momentum softened after peaking at 5.1% in August, though we think the pace remained respectable against a backdrop of slowing macro readings,” says Maybank Kim Eng Research analyst Thilan Wickramasinghe in a Nov 29 report.

“Interestingly, domestic loans increased 2.6% y-o-y – their fastest pace since February 2019. This suggests a pick-up in economic activity,” he adds.

Domestic business loans grew 5.2% y-o-y, which Wickramasinghe believes “may signal a pick-up in SME activity”. However, this was partially offset by continued weakness in domestic consumer loans, which fell 1.2% y-o-y in October, led by a decline in mortgages.

“Loan resilience should provide some respite to banks from a weakening rate cycle. Also, rising overseas mortgages may herald positive spillover for other private-banking operations, spelling upside for fee income,” Wickramasinghe says.

Maybank’s top pick for the sector is United Overseas Bank (UOB). The brokerage has a “buy” call on UOB with a target price of $30.50.

“Given its strong positioning, rising domestic SME loan demand should be positive for UOB,” Wickramasinghe says.

Maybank also has a “buy” recommendation on DBS Group, with a target price of $29.92. The brokerage has a “hold” call on Oversea-Chinese Banking Corporation (OCBC), with a target price of $11.26.

Meanwhile, Fitch Ratings believes moderate asset-quality stresses could be a drag on Singapore banks’ earnings, with worsening trends seen to continue.

“Singapore banks experienced net interest margin (NIM) compression, asset-quality deterioration and slowing loan growth in 3Q19. We expect these trends to continue and believe that earnings may have peaked in this cycle,” say Fitch Ratings’ Priscilla Tjitra and Ng Wee Siang in a Nov 25 note.

“Singapore’s short-term interest rates have declined in response to rate cuts in the US, as reflected in the quarter-on-quarter narrowing in NIM. Fitch views this NIM trend as likely to continue due to the lagged effect of lower rates and continued competitive pricing,” they add.

As at 3.49pm on Monday, shares in UOB are trading 15 cents lower at $25.67, shares in DBS are trading 16 cents lower at $25.09, and shares in OCBC are trading 5 cents lower at $10.73.