Net interest margins are set to rise by 3-5bp.
Banks in Singapore can only look forward to mild gains as net interest margins are set to record growth in the low single-digits for 2019 amidst tight corporate lending rates and heightened funding costs, according to a report from CIMB.
“We forecast FY19 NIMs to still increase, albeit by a smaller 3-5bp, as prior rate hikes set into asset yields. Flattish qoq NIM expansion is expected in 4Q18,” analyst Andrea Choong said in a report.
DBS is poised to chart the strongest growth in NIMs on the back of its massive CASA franchise. Its NIM is tipped to have inched 1bp QoQ to 1.87% in Q4 although wealth management, investment banking and trading income have take heavy hits from volatile market conditions.
“NIMs have yet to capture the full benefits of higher rates as funding costs have risen (48-53bp) about as much as asset yields (46-50bp) have in this period as banks focus on building healthy liquidity buffers,” CIMB said in an earlier report. “In our view, margin expansion in the coming quarters will depend on banks’ ability to reprice assets above the impending rise in deposit cost.”
The persistently steep costs of fixed deposits (FD) and weakened corporate loan growth have also slashed the banks’ NIM forecast from 5-10bp in FY18. High FD rates have pushed up funding costs as foreign banks offer attractive packages to defend market share. Indeed, promotional rates offered for a 12-month placement of $22,000 reached as high in January 2019 as 2.05% p.a. from 1.88% offered from the same bank under similar terms in October 2018.
As a result of the fierce competition for FD rates, OCBC’s NIM is expected to rise 1bp QoQ to 1.73% in Q4 2018. Moreover, its large exposure to indebted crude oil supplier Coastal Oil Singapore could act as a key drag.
“We think that heftier credit costs towards normalised levels are in view. OCBC is likely to have been hit the hardest, in part for its US$122.7m exposure to Coastal Oil Singapore which, we understand, could have been exhibiting positive cash flows up until liquidation, as well as the particularly muted levels of provisions in 9M18,” noted Choong.
Like its peers, UOB is set to book flattish NIM growth at 1.81% in Q42018 given its low exposure to volatile segments. “We note that the bank’s modest appetite for risk comes at the cost of reaping broad margins; reduced risk appetite would translate into extending lower-yielding loans,” she said.
Despite its smaller CASA funding cost shield, Choong notes that UOB appears to be in a stronger position to weather the displacement from escalating trade tensions. “UOB replaces OCBC as our sector top pick for its more defensive disposition against the US-China trade war noise. UOB’s fee income engines are also less exposed to market volatility compared to its Singapore peers,” she said.
This is partially because the wealth management arm of UOB targets the mass affluent to generate more stable and less market-dependent fees unlike DBS and OCBC whose WM and treasury businesses will be affected given their larger private banking franchises. The insurance business of OCBC makes it particularly open to mark-to-market (MTM) losses in the unstable market conditions.
According to Fitch Solutions data, DBS has the highest loan exposure to Greater China amongst the Big 3 at 31% as of September 2018 whilst OCBC and UOB have loan exposure of 26% and 15% respectively.
Do you know more about this story? Contact us anonymously through this link.