Singapore Banking Monthly – Long and gradual recovery ahead September 7, 2020 404

  • Current levels of 3M-SIBOR and 3M-SOR at 0.41% and 0.21% remain at stabilised levels throughout 3Q20.
  • Singapore saw a second consecutive month of negative loans growth (-0.3% YoY). Business loans rebound to grow 1.48% but weak consumer loans (-3.13%) continue to weigh on loans outlook.
  • Credit rating agency Fitch contemplates ‘AA-’ rating of three local banks on poorer operating environment. However, Fitch’s outlook guidance is in line with outlook provided by the banks in 1Q20.
  • FTSE Taiwan Index Futures launched in July is the sixth most traded equity index futures contract on SGX in August.
  • Maintain the Singapore Banking Sector at NEUTRAL. Resumption of business activities will lift non-interest income despite likelihood of prolonged low interest rates putting a drag on interest income.


Interest rate unchanged in August

3M-SIBOR and 3M-SOR has held steady in the third quarter at 0.41% and 0.21% respectively. However, with reported NIMs in 2Q20 at historical lows, we are not likely to see much more downside to NIMs in the subsequent quarters as banks actively monitor their margins through repricing and cycling off excess liquidity from the balance sheet.



Loans growth improves but remain negative in July

Loans growth remained negative for a second consecutive month, shrinking 0.3% YoY in July. However, both business loans and consumer loans data improved from June (Figure 3).

Business loans grew 1.48% YoY in July, with growth in business services (+21.7%), building & construction (+4.9%), transport, storage & communication (+3.6%) as well as financial institutions (+1.8%) lifting weakness observed in agriculture, mining & quarrying (-23.4%), professionals & individuals (-8.9%), manufacturing (-4.6%), general commerce (-2.0%) and others (4.3%).

Weakness continued to be observed across the board for consumer loans (-3.13% YoY). Nevertheless, credit card loans increased 2% MoM, growing for a second straight quarter after shrinking for five consecutive months previously (Figure 4). Increased credit card spending will likely see recovery in credit card fees for the banks.


‘Rating Watch Negative’ (RNA) from Fitch not a concern for the banks

On 31 August, Credit rating agency Fitch issued a report which raised concerns of a potential downgrade of the ‘AA-’ credit rating of the three local banks.

In its report ‘Singapore Banks: Limited Rating Headroom’, Fitch mentioned a poorer operating environment that has put pressure on the profitability of the banks. This will lead to ‘thinner margins, higher credit costs and slower credit growth’, which will likely see a deterioration in capital ratios across the banks.

However, the RNA status has been issued since April, and the poorer economic conditions outlined in the report were in accordance with the guidance provided by the banks previously. As such, without any fundamental change in operating environment, we believe that the financial position of the banks remain healthy.


Securities turnover shows sustained growth while derivatives volume remain volatile

Preliminary SDAV data indicates a YoY increase of 17% from S$1,188mn a year ago to S$1,386mn in August (Figure 6). Securities business continue to see sustained growth in the third quarter.

However, derivatives volumes remain volatile.Volumes for the top five equity index futures which makes up more than 95% of monthly equity index futures contract turnover fell by an average of 12% YoY in August (Figure 7) after recording a 27% YoY increase in July (Figure 6).


FTSE Taiwan Index Futures well on track to replace MSCI Taiwan Index Futures

The newly launched FTSE Taiwan Index Futures recorded more than 350,000 traded contracts in August. The contract was the sixth most traded equity index futures on SGX, offsetting the lower volumes traded from MSCI Taiwan Index Futures contracts which will stop trading in February 2021 (Figure 8).

The popularity of the FTSE Taiwan Index Futures as a substitute product to its MSCI counterparts leads us to believe that expiring MSCI contracts will not dampen outlook for SGX’s equity derivatives business given more FTSE contracts that will be launched as replacements. 


Investment Action

Maintain the Singapore Banking Sector at Neutral. While interest rates will continue to weigh on NIMs, resumption of business activities will lift non-interest income. We remain of the view that the banks have entered a period of gradual recovery from the earnings hit observed in 2Q20.

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About the author

Profile photo of Tay Wee Kuang

Tay Wee Kuang
Research Analyst
Phillip Securities Research

Wee Kuang currently covers the Banking and Finance as well as the Healthcare sector. Wee Kuang has had 2 years of experience as a Trading Representative (TR) before his current stint as an Analyst. As a TR, Wee Kuang developed a keen interest in investor education and hopes to be able to provide better insights for investors in his current role.

Wee Kuang graduated with a Bachelor of Business Management (Cum Laude) with major in Finance and Operations Management in 2017.

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