• Federal Reserve held rates steady in the range of 1.5% – 1.75%. NIM for Singapore banks expected facing compression, especially with 3-month SIBOR down 11 bps YoY to 1.78% end Dec19.
• Singapore domestic loans grew at a stable pace of 3.1% in December 2019.
• Application for Digital Banking license closed on 31 Dec 2019. Based on MAS’ timeline, Digital Banks will likely begin operations only in 2021.
• Maintain Singapore Banking Sector at Overweight. Strong efforts in capital management will manage downside risks and provide sustainable dividend yields of near 5.0%.

Federal Reserve held interest rates steady

In the meeting on last Wednesday (29 Jan), all 10 members of Federal Reserve’s rate-setting panel voted unanimously to hold the rates stable in the range between 1.5% and 1.75%. The dovish tone by Federal Reserve Chairman Jerome Powell during the statement seems to suggest the unlikelihood of a rate hike.

With the return of low-interest rates, SIBOR will be suppressed and this will affect NIMs for local banks. After peaking at 2.01% in May 2019, SIBOR has since fallen by 23 bps to 1.78% after the Federal Reserve returned to its rate cut policies. As such, we expect the local banks to face NIM compression.

Singapore loans growth stabilising

Total domestic outstanding loans remained stable in December 2019 across both domestic and consumer loans, bringing loans growth to 3.1% for the year of 2019. This result in higher than the average growth rate of 2.7% per annum over the past 5 years. However, consumer loans continued to show weakness in December, resulting in the first contraction in five years, shrinking by 1.3%. This result was partially offset by business loans, which grew 5.9% YoY.

As at end 2019, the figure for total loans outstanding stands at S$692bn, with business loans and consumer loans making up 62% and 38% respectively.

Applications for Digital Banking License

Applications closed on 31 Dec 2019. Successful applicants are slated to be announced in the middle of 2020. There will be a total of five licenses up for grabs – two Digital Full Bank (DFB) and 3 Digital Wholesale Bank (DWB) licenses.

We do not expect the digital banks to have any significant on the incumbent banks due to the following reasons:

• The three incumbent local banks have a larger scale, network, reputation as well as technology investments compared to the new entrants.
• Any competitive advantage or innovation created may be transient and replicated by incumbent banks
• Banking services are well penetrated in Singapore, unlike the Emerging Markets. Any ‘under-served’ segments to be served by digital banks signals inherently low profitability.
• Limited scope of business as global trends point to an avenue for profitability restricted to lending or transferring of funds which we believe will limit growth opportunities for digital banks.
• Digital bank will become a complementary service instead of a core segment of our banking system.

For more information, please refer to Table 1 for more information.

Investment Actions

Maintain the Singapore Banking Sector at Overweight. The global economic slowdown and likelihood of interest rates being held steady will continue to weigh on the banking industry.  The extent of impact the coronavirus will have on the global economy also remains as a huge uncertainty. However, Singapore banks will be buoyed by their efforts in capital management. Apart from insulating the banks from external risks, prudent management of capital ensures sustainable dividend payout for investors.  This means that an indicative dividend yield (based on past dividend data) of 4 – 5% will continue to remain attractive among investors.

We prefer UOB within the Singapore Banking Sector due to the following reasons:

• Lowest exposure to Greater China and Hong Kong as compared to DBS and OCBC.
• Lower room for NIM compression as a result of falling interest rates; and
• Defensive wealth management business targeting the mass affluent.