The way rates and liquidity shifts affect Singapore banks is through their net interest margins (NIM). The local banks tend to benefit from higher interest rates as they can reprice their loans faster than their deposits. Moreover, the local banks’ funding is mainly through low-cost Casa and fixed deposits rather than wholesale funding.
During the 2022-2024 rate hike cycle, rates were high enough for banks to reap hefty levels of net interest income but stable enough for asset quality to remain benign overall. Some areas of asset quality problems were experienced with commercial real estate in US and Hong Kong.
In a one-off development, United Overseas Bank had asset quality issues with the Citigroup retail portfolio in Thailand which has since been resolved.
“We expect three direct channels of impact: the shift in rate outlook affecting NIM, slowdown in global trade and investment affecting trade fees, wealth management and growth, and the emergence of asset quality risks in a potential recession scenario,” says JP Morgan in its update.
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According to the April 8 report, NIM pressures based on three rate cuts in 2025 would cause a 3% to 5% decline in earnings per share (EPS). Trade fees account for 6% to 8% of non-interest income, and trade exposure is around 10% of loans for DBS Group Holdings and UOB, the report adds.
“All in, a scenario of six rate cuts, a 20% decline wealth management and trade fees and 20bps higher credit costs could have a 15% EPS impact,” JP Morgan says. “Beyond this, we expect capital management (consistency of buyback) and growth/recession expectations to drive multiples, with each 1x price/ earnings ratio equivalent to around 10-11% of the stock price,” JP Morgan estimates.
Based on JP Morgan’s analysis, UOB’s earnings appear the most at risk amongst the three local banks.
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On the other hand, should tariff negotiations lead to a swift full or part reversal for any market, it would help limit the downside, JP Morgan says.
On April 8, Bloomberg reported that Malaysia, Vietnam, Thailand and Indonesia are sending delegations to Washington DC. The report adds that Vietnam offered to remove all tariffs on US imports after the Trump administration announced a 46% levy on Vietnam. Singapore will set up a task force headed by deputy prime minister Gan Kim Yong, to help businesses and workers to address the new environment.
