SINGAPORE (Feb 1): Banks are increasingly turning into yield plays, which tend to do well when interest rates are not rising sharply.

And analysts expect the three local banks to continue to experience slow and steady growth this year and into 2020, global financial crises notwithstanding.

In a recent interview with The Edge Singapore, Harsh Modi, banking analyst at JPMorgan for Southeast Asia, indicated that Singapore banks stood out as the most visible in terms of margins and loan growth.

“We hosted 12 banks across Asean recently and most of the discussions [revolved] around the outlook for 2019. For Singapore banks, the key message is of reasonably high confidence on margins, but [loan] volume growth is going to be a bit slower,” says Mod who indicated that Singapore banks stood out as the most visible in terms of margins and loan growth.

As yield plays, the banks’ dividend yields will be measured against the yield of 10-year Singapore government securities, and not against the trend of Sibor/SOR. Yields on 10-year SGS are relatively stable at 2.2%.

“As domestic interest rates go up, the local banks end up repricing loans faster than deposits, and margins tend to move [up],” Modi says.

Since DBS has 90% of its deposits in Singapore dollar CASA (the highest among the local banks), and its loan-to-deposit ratio is 89% (also the highest among the banks), it offers the best combination for higher NIM, according to Modi.

The general view is that banks can maintain their current levels of dividends, given that interest rates are going up, return on equity is rising and growth is slowing down. Slower growth also means banks may not need so much capital.

DBS reports FY2018 results on Feb 18, followed by UOB and OCBC on Feb 22.

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