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