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.
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%.