Singapore banks' system loans in its longest streak of contraction since 2005

Loans contracted 2.2% YoY in October 2016.

Since Trump’s victory in Nov-16, Maybank Kim Eng notes that Singapore banks have rallied ~8-18% on expectation US fed fund rate will normalize, and due to oil and USD strength. But fundamentally, our outlook has not changed.

In fact, Oct system data further validates the analyst's negative view on the sector.

"System loans contracted 2.2% YoY in Oct-16, its longest streak of contraction since 2005. System NPL ratio rose to 2.1% as of Sep’16 (Sep’15: 1.5%). Over the next few quarters at least, we think banks will focus on driving revenue and cost containment as asset quality is worsening."

Here's more from Maybank Kim Eng:

We think loan pricing in Singapore will remain competitive for Singapore banks to retain or gain market share, as they were lending out faster at 4-5% YoY growth vs system’s -5% as of Sep.

Overall, we estimate 0-2% loan growth in FY17 for Singapore banks as we believe: 1) banks will be cautious in their lending and will only work with customers whom they are familiar with; and 2) lackluster lending environment.

Post-Trump’s victory, 3M SIBOR and 3M SOR rose by ~5bps and ~6bps respectively. The main bulk of banks’ Singapore loan book is pegged to floating rates. Going forward, we expect SIBOR to rise by ~25bps each for FY17-18E, and NIMs to remain stable or expand slightly across the banks.

If banks’ NIM rises by 5bps from our FY17E NIM estimate, we estimate FY17E net profits will increase by 3-5%, ceteris paribus.