Net interest gains are under pressure.
According to Barclays Research, it expects ongoing pressure on net interest income for the Singapore banks due to: 1) slowing loan volumes driven by weakening corporate loan demand; and 2) lower margins driven by fierce loan and deposit competition.
Here's more from Barclays Research:
As loan growth slows, the Singapore banks’ abundant liquidity will likely become an increasing drag on margins. We turn neutral on the Singapore banks sub-sector (from positive previously), which is in line with our Neutral view for the Asia-ex Japan Banking industry.
Slower volumes: Corporate and cross-border China trade finance business is slowing, therefore we lower our loan growth estimates to 8-9% in FY12-13E (from 9-12%).
Regional ASEAN underlying loan volumes (Thailand, Indonesia and Malaysia) remain robust, although we expect this will be partially offset by currency translation losses at the group level from the continued strength of SGD vs USD (+6.5% in FY12E and +2.5% in FY13E).
Lower margins: We believe margins will come under pressure due to 1) rising funding costs from deposit competition led by foreign banks (promotional SGD time deposit rates ~1%), 2) pressure on loan yields as corporate lending slows while lower-yielding mortgage growth remains strong, and 3) the impact of lower interest rates in key operating geographies (e.g. China rate cuts in June/July 2012).
We forecast 7bp y/y contraction in both FY12E and FY13E and 4-7bp q/q margin contraction in 3Q12E.
Less positive outlook: We believe Singapore bank’s funding strength bodes well longer-term but is a near-term drag on margin and profitability as loan growth slows. We see greater risk on the downside to our 3Q12E earnings estimates (reporting season begins 1 Nov with DBS). We cut our FY13-14E earnings estimates by 5-7% on average and are 3-4% below Bloomberg consensus.
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