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S’pore banks to get earnings boost from rising rates: Analysts

SINGAPORE — The three Singapore banks’ stand to enjoy a boost to earnings from rising domestic interest rates, whose climb will likely be made quicker by the Monetary Authority of Singapore’s (MAS) move earlier this week to slow the pace of the local currency’s appreciation, analysts said yesterday.

Analysts singled out DBS as the main beneficiary of the MAS move. TODAY FILE PHOTO

Analysts singled out DBS as the main beneficiary of the MAS move. TODAY FILE PHOTO

SINGAPORE — The three Singapore banks’ stand to enjoy a boost to earnings from rising domestic interest rates, whose climb will likely be made quicker by the Monetary Authority of Singapore’s (MAS) move earlier this week to slow the pace of the local currency’s appreciation, analysts said yesterday.

DBS, Oversea Chinese-Banking Corp (OCBC) and United Overseas Bank (UOB), being some of the most “rate-sensitive” banks in the region, could see their bottom lines improve between 1 and 3 per cent for every 25 basis point rise in the Singapore Interbank Offered Rate (Sibor), they said.

The three-month Sibor, which is used to price most mortgages here, has been inching closer to 0.7 per cent from around 0.4 per cent at the end of last year in anticipation of an interest rate hike in the United States and a weaker Singapore dollar versus the greenback. And the move by MAS on Wednesday to reduce the slope of the Singapore dollar nominal effective exchange rate will help to keep Sibor elevated.

“The reduction of the appreciation slope could keep pressure on the US and Singapore dollar exchange rate and thus could ensure Sibor remains at current levels … This move by MAS helps keep Singapore policy on a stable footing, and we expect it to be modestly beneficial for Singapore bank earnings,” analysts from Morgan Stanley said in a research note.

Most analysts singled out DBS as the main beneficiary among the three lenders, given its larger share of Singapore dollar deposits and US dollar loans. “All the three Singapore banks benefit but DBS more than others because its strong deposit franchise allows it to keep its funding cost low in a rising interest rate environment. Our second pick is OCBC,” said Nomura research analyst Jaj Singh.

However, falling property prices in Singapore are placing pressure on the banks’ loan books, threatening to increase the amount of bad debt, and rising interest rates could further affect borrowers’ repayment ability.

Still, ratings agency Fitch said in a report yesterday that the three Singapore banks have healthy loss-absorption buffers. “Fitch expects Singaporean banks’ potential losses from mortgages to be minimal due to relatively healthy household balance sheets and adequate collateralisation. The government’s macro-prudential policies over the past few years included measures to strengthen mortgage underwriting practices at local banks,” the report said.

“While we anticipate Singapore banks’ loan losses to rise as the property market continues to cool, Fitch expects the MAS to remain vigilant for signs of stress. The agency remains watchful of potential second-order effects of the housing slowdown, such as weaker private consumption and rising construction company defaults.”

DBS analyst Lim Sue Lin said the number of defaulters would be contained by the current strong employment situation here. “Unless unemployment rises significantly, we believe asset quality should remain healthy for the banks. Mortgage delinquencies have been low and are expected to remain low unless unemployment spikes up significantly,” she said.

DBS, OCBC and UOB are due to announce their fourth-quarter financial results in the week of Feb 9. They are expected to end the year on a strong note, although earnings in the last three months of 2014 could be more moderate compared to previous quarter given the seasonally softer year-end season.

In December, bank lending remained flat at S$608 billion compared to the previous month, with sectors such as manufacturing and general commerce registering a decline in loans, while others such as building and construction saw increases, the MAS said yesterday. This translates to full-year bank loan growth of 11.4 per cent last year from a year earlier, the slowest pace since 2010.

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