Local lending rates continue to dip
Interest rates continue to show weakness, with 3M-SIBOR and 3M-SOR falling to as low as 0.55% and 0.16% respectively in May. Current 3M-SIBOR and 3M-SOR levels of 0.56% and 0.20% are 99 bps/109 bps lower than 1Q20 average of 1.55% and 1.29% respectively (Figure 2).
HIBOR rebound off recent lows
1M and 3M-HIBOR fell to YTD lows of 0.59% and 1.06% respectively in May, but swiftly rebounded back to 1.01% and 1.20%. Current levels are down 80 bps and 78 bps from 1.81% and 1.98% for 1M and 3M-HIBOR respectively (Figure 4).
Local banks slashed deposit rates to manage pressure on NIMs
With mounting pressures on NIMs, local banks have turned to reducing funding costs by lowering deposit rates.
OCBC halved interest rates on their high-interest accounts, the OCBC 360 account, from 1.2% on the first S$35,000 and 2.4% on the next S$35,000 to 0.6% and 1.2% respectively (Figure 5) with a minimum salary crediting of S$1,800. Bonus interest of 0.2% and 0.4% on the first and next $35,000 was also removed. The new rates will take effect from 1 July 2020.
Similar moves were made by DBS and UOB to manage funding costs on their high-interest accounts – the DBS Multiplier account as well as the UOB One account – respectively.
In February, changes were made on the DBS Multiplier account such that higher interest was applied on balances up to S$25,000, which was reduced from S$50,000 previously. Interest rates were also capped at 2%, down from 2.08% in May assuming all spending criteria are met.
UOB maintained eligible deposit quantum for higher interest at S$75,000, but slashed interest from between 1.50% – 2.44% to an average of between 0.50% – 1.80% assuming all spending criteria are met.
Weakness observed in loans growth
Domestic loans growth dipped to 1.98% YoY in April (Figure 6), below our expected range of 2% – 3% for 2020.
Business loans grew 5.36% YoY in April, maintaining at healthy levels above 5% since October 2019.
Consumer loans shrank 3.28% YoY in April, the steepest decline since consumer loans started shrinking in April 2019. In particular, credit card loans fell 13.1% YoY, signalling poorer consumer sentiments which can continue to weigh on the performance of consumer loans.
Volatility falls towards normalcy as derivatives momentum reverses
SDAV grew 34% YoY to $1.477mn in May (Figure 9). However, part of the growth was attributed to the rebalancing of MSCI Singapore Index at the end of the month. Removing the spike as a result of the rebalancing will see SDAV growing by 22% YoY, a slower but robust growth.
VIX averaged 30.9 in May, falling for second consecutive months as market outlook turns positive as economies starts to reopen. DDAV will likely come under pressure in May, but may be bolstered by short term trading volumes as clients begin unwinding their positions after SGX announced the partial cessation of its MSCI licensing in February 2021.
Partial cessation of the license agreement with MSCI
On 27th of May, SGX announced that it will be reducing its licensing agreement with MSCI after the current agreement expires in February 2021. 25 of 28 of its MSCI equity derivative products will cease trading, with only Singapore index futures remaining.
MSCI will be launching its products on Hong Kong Exchange (HKEX) moving forward.
Based on SGX’s latest monthly report for April, the affected offerings make up 14% of total equity derivative contracts (1.7mn contracts of 12.3mn total contracts in April 2020). Based on open positions at the end of April, there were 670k open positions or 37% of all open positions, that will be affected by the cessation of licensing agreement with MSCI.
Equity derivatives contribute to 36% of SGX’s total revenue in 3Q20 (Figure 10), and the cessation of licensing agreement will lead to lower trading and clearing revenue due to reduced trading volumes as well as lower treasury fees from lesser open market positions.
SGX expects earnings impact of between 10 – 15% for FY21, assuming an immediate cessation on 1 July 2020. However, immediate impact may be bolstered as clients have until February 2021 to unwind and close out existing positions.
Nevertheless, SGX will be able to deepen partnerships with existing index partners such as FTSE to launch replacement products. FTSE currently provides SGX with its China A50 index futures, which makes up close to half of SGX’s total derivatives volume in April (6.0mn contracts out of 12.2mn total contracts).
SGX’s acquisition of Scientific Beta in January also provides SGX with capabilities to launch competing products that can replace expiring products. The pivot towards a multi-asset strategy beyond equities and derivatives may provide SGX with a reprieve in the longer term.
Investment Action
Maintain the Singapore Banking Sector at Neutral. The respective banks’ have been downgraded to NEUTRAL from ACCUMULATE previously due to the strong price movement over the past week. No changes have been made to our underlying estimates.
We feel that the recent run-up in prices may have underestimated some underlying risks arising from heightened credit costs in the near term. Nevertheless, yield remains attractive at c.5%.
Important Information
This report is prepared and/or distributed by Phillip Securities Research Pte Ltd ("Phillip Securities Research"), which is a holder of a financial adviser’s licence under the Financial Advisers Act, Chapter 110 in Singapore.
By receiving or reading this report, you agree to be bound by the terms and limitations set out below. Any failure to comply with these terms and limitations may constitute a violation of law. This report has been provided to you for personal use only and shall not be reproduced, distributed or published by you in whole or in part, for any purpose. If you have received this report by mistake, please delete or destroy it, and notify the sender immediately.
The information and any analysis, forecasts, projections, expectations and opinions (collectively, the “Research”) contained in this report has been obtained from public sources which Phillip Securities Research believes to be reliable. However, Phillip Securities Research does not make any representation or warranty, express or implied that such information or Research is accurate, complete or appropriate or should be relied upon as such. Any such information or Research contained in this report is subject to change, and Phillip Securities Research shall not have any responsibility to maintain or update the information or Research made available or to supply any corrections, updates or releases in connection therewith.
Any opinions, forecasts, assumptions, estimates, valuations and prices contained in this report are as of the date indicated and are subject to change at any time without prior notice. Past performance of any product referred to in this report is not indicative of future results.
This report does not constitute, and should not be used as a substitute for, tax, legal or investment advice. This report should not be relied upon exclusively or as authoritative, without further being subject to the recipient’s own independent verification and exercise of judgment. The fact that this report has been made available constitutes neither a recommendation to enter into a particular transaction, nor a representation that any product described in this report is suitable or appropriate for the recipient. Recipients should be aware that many of the products, which may be described in this report involve significant risks and may not be suitable for all investors, and that any decision to enter into transactions involving such products should not be made, unless all such risks are understood and an independent determination has been made that such transactions would be appropriate. Any discussion of the risks contained herein with respect to any product should not be considered to be a disclosure of all risks or a complete discussion of such risks.
Nothing in this report shall be construed to be an offer or solicitation for the purchase or sale of any product. Any decision to purchase any product mentioned in this report should take into account existing public information, including any registered prospectus in respect of such product.
Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, may provide an array of financial services to a large number of corporations in Singapore and worldwide, including but not limited to commercial / investment banking activities (including sponsorship, financial advisory or underwriting activities), brokerage or securities trading activities. Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, may have participated in or invested in transactions with the issuer(s) of the securities mentioned in this report, and may have performed services for or solicited business from such issuers. Additionally, Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, may have provided advice or investment services to such companies and investments or related investments, as may be mentioned in this report.
Phillip Securities Research or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report may, from time to time maintain a long or short position in securities referred to herein, or in related futures or options, purchase or sell, make a market in, or engage in any other transaction involving such securities, and earn brokerage or other compensation in respect of the foregoing. Investments will be denominated in various currencies including US dollars and Euro and thus will be subject to any fluctuation in exchange rates between US dollars and Euro or foreign currencies and the currency of your own jurisdiction. Such fluctuations may have an adverse effect on the value, price or income return of the investment.
To the extent permitted by law, Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, may at any time engage in any of the above activities as set out above or otherwise hold an interest, whether material or not, in respect of companies and investments or related investments, which may be mentioned in this report. Accordingly, information may be available to Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, which is not reflected in this report, and Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, may, to the extent permitted by law, have acted upon or used the information prior to or immediately following its publication. Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited its officers, directors, employees or persons involved in the issuance of this report, may have issued other material that is inconsistent with, or reach different conclusions from, the contents of this report.
The information, tools and material presented herein are not directed, intended for distribution to or use by, any person or entity in any jurisdiction or country where such distribution, publication, availability or use would be contrary to the applicable law or regulation or which would subject Phillip Securities Research to any registration or licensing or other requirement, or penalty for contravention of such requirements within such jurisdiction.
This report is intended for general circulation only and does not take into account the specific investment objectives, financial situation or particular needs of any particular person. The products mentioned in this report may not be suitable for all investors and a person receiving or reading this report should seek advice from a professional and financial adviser regarding the legal, business, financial, tax and other aspects including the suitability of such products, taking into account the specific investment objectives, financial situation or particular needs of that person, before making a commitment to invest in any of such products.
This report is not intended for distribution, publication to or use by any person in any jurisdiction outside of Singapore or any other jurisdiction as Phillip Securities Research may determine in its absolute discretion.
IMPORTANT DISCLOSURES FOR INCLUDED RESEARCH ANALYSES OR REPORTS OF FOREIGN RESEARCH HOUSE
Where the report contains research analyses or reports from a foreign research house, please note:
