• Despite the rate cut by the Federal Reserve totalling 150 bps in March, local interest rates are showing short-term resilience. NIMs may compress by mid-teens level for the full year, less than previously expected.
• February loans growth was stable at 05% YoY. Loans will likely sustain at current levels of growth with various government measures to encourage lending amidst liquidity crunch faced by businesses as the COVID-19 pandemic ensues.
• Derivatives volume rose 34% YoY in March as volatility is at their highest monthly levels since the 2008 Global Financial Crisis.
• Maintain Singapore Banking Sector at Overweight. Local banks will benefit from the slew of measures introduced by the government to reduce the strain on the financial system through risk-sharing and provision of low-cost funding.

Reprieve in local lending rates

Despite the surprise double rate cuts of 150 bps by the Federal Reserve in March, we have observed local interest rates showing signs of resistance to the drop. 3M-SIBOR fell by 73 bps while 3M-SOR fell more than 120 bps from February peaks before rebounding roughly 50 bps to current levels. The stabilisation in lending rates will determine how well local banks will be able to resist NIM compression pressures.

The lag effect of NIM compression means the full impact of the drop in interest rates should only be experienced in 2H20. As such, we expect full-year NIM across the three local banks to fall by mid-teens level, lower than previously expected of beyond 20 bps.

HIBOR rebounds from lows

Similar to the resilience shown in SIBOR, both 1M and 3M-HIBOR also rebounded from lows after the double rate cuts in March to slightly under 2%, less than 20 bps below-average levels observed in February.

Loans growth hold steady

Domestic loans grew 3.05% YoY in February, holding YoY growth rates steady since November 2019. With a series of regulatory and supervisory adjustments by MAS to encourage and support lending activities by financial institutions as the economy faces headwinds from the COVID-19 pandemic, loans growth may be bolstered and come in at the higher end of our 2 – 3% forecast for the full year.

Nevertheless, an industry-wide loan restructuring is expected – including the extension in loan tenures and lowering of interest rates. The restructuring will not affect allowances, but deferment to interest payments may see reduced cash flow for the banks in the short-term.

For more information on the series of MAS announcements to support lending activities by financial institutions, please refer to Annex A and Annex B.

Derviative volumes set to benefit from heightened volatility

The VIX index recorded a monthly average of 82.06 points in March, the highest level since the 2008 GFC. SGX’s DDAV jumped 34% YoY in March, derivatives volume for SGX 3Q20 recorded 23%, 11% and 34% respectively across each of the three months.

The market sell-down led by the spike in volatility also saw massive fund flow in the equity market. SDAV more than doubled in March (+114% YoY), also reaching record levels since the 2008 GFC.  SDAV for March quarter is up 114% YoY.

The improvement to SDAV and DDAV will likely see earnings beat our estimations by 25% for the quarter ending March.

Investment Action

Maintain the Singapore Banking Sector at Overweight. With the MAS stepping in with monetary policies to reduce the impact of the COVID-19 pandemic on the economy, local banks will be partially relieved of their burden placed on the financial system. Short-term liquidity may be impacted as loan repayments are deferred, but risk sharing by the government will allow banks to mitigate risks to asset quality, while availability of low-cost funds by the government will allow banks to have the ability to support loans income over the long term  once the pandemic comes to pass.