Citi Research analyst Tan Yong Hong believes there could be downside risks to Singapore banks’ net interest margins (NIMs) due to plummeting rates on the Singapore Overnight Rate Average (SORA) and the market pricing in more rate cuts from the US.
“Despite stable US rates, SORA has been pressured lower on [the] Monetary Authority of Singapore’s (MAS) incompletely sterilised foreign exchange (forex) interventions and flush banking system liquidity,” Tan writes in a report dated March 11 (US Eastern time).
In his view, this could continue as long as there is scope to lower the Singapore dollar nominal effective exchange rate (S$NEER) within the band. On Jan 24, the MAS said it would reduce the slope of its S$NEER policy band “slightly”, marking the first easing conducted by the central bank since March 2020.
“Despite 100 basis point (bps) cuts in [the] US Fed Fund Rate, [the] three-month (3M) SORA [fell by] -86 bps (from 3.5% to 2.7%), more than historical transmission of 60%,” Tan points out. “Spot SORA plunged to 2.15% on March 10 implying further downside.”
“Singapore dollar (SGD) ST rates historically price in on average 0.6 times of US rates, but domestic liquidity and MAS policy likely have increased that transmission in this Fed rate cut cycle,” Tan adds.
With investors buying into the three Singapore banks, DBS Group Holdings, Oversea-Chinese Banking Corporation (OCBC) and United Overseas Bank (UOB), for their defensive currency and capital management initiatives, Tan warns that the banks may see near-term earnings risks which may have been overlooked by the market.
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In addition to the falling SORA, Tan notes that the banks have lowered their fixed deposit (FD) rates by 40 bps with an average duration of over six months. “[This implies an] easing cost of funds reflecting only in 2QFY2025,” he says.
The banks are also likely to lower their FY2025 NIM guidance, with OCBC’s guidance for a materially lower NIM could “prove to be the most realistic”.
In their outlook statements, OCBC is expecting to see three rate cuts from the US compared to DBS’s estimate of two cuts and UOB’s one.
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To this end, Tan has lowered his earnings estimates for all three banks after factoring in three US rate cuts from two previously. He has also raised his NIM sensitivities due to the falling benchmark SORA rates. “[The] consensus expects -12 bps/-5 bps/-4 bps NIM contraction in FY2025 y-o-y for DBS/OCBC/UOB, largely reflecting [their] respective guidance. We expect 1QFY2025 NIM headwinds from asset yields repricing lower to drive earnings downgrade.”
The analyst has cut UOB’s earnings projections by 1% to 3% driven by rates. He also expects the bank’s FY2025 NIM to be at 1.95% compared to the consensus’ estimate of 1.99%. UOB”s earnings are also expected to be 5% to 9% below the consensus’ estimate from FY2025 to FY2027.
Tan has also lowered OCBC’s earnings estimates by 2% for FY2025 to FY2026 on moderating NIM forecast, bringing his FY2025 – FY2027 estimate 0% to 4% below consensus’ estimates. Tan’s estimated FY2025 NIM of 2.09% is in line with the consensus.
Finally, the analyst has lowered DBS’s FY2025 to FY2027 earnings estimates by 1% due to lowered NIM, which remains in line with the consensus. Tan sees DBS’s year-end FY2025 NIM at 2.06%, compared to the consensus’ estimate of 2.08%.
“DBS [is] likely most resilient with 60% - 70% of that hedged as fixed rate assets, with 50% - 60% of $200 billion fixed rates assets in [its] Singapore dollar (SGD) portfolio,” he writes.
Due to these factors, Tan has downgraded his call on UOB to “neutral” from “buy” previously with a lower target price of $36.90 from $42.30 previously. “Based on our earnings forecast, we see most earnings risks for UOB, followed by OCBC and DBS.”
Even though he has kept his “buy” calls on DBS and OCBC, the analyst has also lowered their target prices. DBS’s target price is now at $49.30 from $50.20 before while OCBC’s target price is down to $16.30 from $17.20.
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Tan has also removed his 90-day positive catalyst watch for DBS as he believes there could be “near-term share price volatilities as the best owned names within the sector”.
“However, DBS is trading near [around] 7% 12-month forward dividend yield and ongoing share buyback should provide some support,” he adds.
When Tan opened his positive catalyst watch for DBS on Feb 14, the bank was his preferred pick, followed by UOB and OCBC.
As at 10.49am, shares in DBS, OCBC and UOB are trading at $44.55, $16.64 and $37.23 respectively.
