On March 30, JP Morgan downgraded the local banks for slightly different reasons. The report points out that credit costs and NPLs could rise against a background of weaker global growth for 2023 and 2024. The mini banking crisis for regional US banks and Credit Suisse is likely to lead to less liquidity, which could have a similar impact as interest rate hikes of as much as 200 bps, according to some US pundits. Against that backdrop, the US Federal Reserve may not be inclined to raise the Federal Funds Rate much further than its current level of around 5%.
If there are no more rate hikes this year, the banks’ highest net interest margins may be behind them. On the contrary, as funding costs such as deposits catch up, NIMs could even be under pressure.
Altogether, higher credit costs, pressured NIMs and a potential recession are good enough reasons to downgrade the banks, which is what JP Morgan has done in its March 30 report.
"Multiples should move below fair as NPLs increase, irrespective of rate-led PPoP (pre-provisioning operating profit) support in 2H2023-1H2024. Regulatory tightening on payout, deposit insurance and risk weights cannot be ruled out. Our downgrade is on expectations of a recession, not a crisis. Yet the risk here is persistent inflation makes it tougher to unwind duration risk, hence recession can be longer,” JP Morgan says.
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In its March 30 report, JP Morgan's recommendation is to underweight DBS (formerly neutral), and OCBC (formerly overweight) while UOB is neutral from overweight. Over and above that, Singapore banks have outperformed developed market banks this year. JP Morgan attributes this to quality of capital, liquidity and risk management. This outperformance in itself provides an opportunity to trim exposures, the report adds.
