• Federal Reserve cut benchmark rates by 50 bps to 1.00% – 1.25% range in response to the macroeconomic uncertainty brought about by the Covid-19 outbreak. NIM may face further compression pressures in upcoming quarters.
• Domestic loans continue slowing (+2.97% YoY) in January, and FY20 loans performance will continue to depend on growth in business loans.
• Short term spike in volatility with escalating threat from Covid-19 will see derivative volumes benefit.
• Maintain Singapore Banking Sector at Overweight. All 3 local banks turned in a set of strong results for 4Q19. The challenging macroeconomic conditions will weigh in on future earnings, but sector remains attractive on dividend guidance.

Surprise rate cuts pile on NIM compression pressures

In response to the mounting threat of the Covid-19 on the global economy as it spreads across more than 80 countries, the Federal Reserve cut benchmark rates by 50 bps to 1.00 – 1.25% on Tuesday, 3^rd of March. The move was a surprise to the market, who was expecting no rate change prior to the virus outbreak.

Loans continue to slow

Loans grew 2.97% YoY, falling below the 3% loans growth mark in January since November 2019. Consumer loans continue to drag down loans figure (-1.01% YoY), but has started to show signs of recovery, as rate of decline started slowing for the first time since April 2019.

On the other hand, business loans continue experiencing strong growth momentum, growing 5.58% YoY. Overall loans growth in 2020 will continue to weigh heavily on performance of business loans, which grew 6% in 2019.

Volatility spikes look to boost derivative volumes

SGX saw derivatives volume decrease in 2Q20 by 13% YoY with lower volatility as a result of easing trade tensions between US and China. Nevertheless, the VIX index has started to trend upwards since November. While SGX saw a dip in DDAV in December due to a typically slower month as a result of seasonal festivities, the uptick in DDAV in January (+24% YoY and +33% from December) in January mimicked the VIX’s increase from 13.78 to 18.84 from December to January.

As the Covid-19 outbreak continue to escalate across the globe, the VIX index spiked above 40 towards the end of February. SGX’s DDAV should continue to benefit as investors turn to derivatives to manage volatility in the market. However, we should see February’s data hold constant from levels observed in January before an expected spike in DDAV statistics in March.

Fall in HIBOR add woes to banks’ margin

After peaking in December, HIBOR fell steadily through February.  Following rate cuts in US, 1M and 3M-HIBOR fell to almost 1 year lows of 1.19% and 1.39% respectively. This will further stress banks’ NIMs for 1Q20.

Loans growth, however, remains a bright spot in Hong Kong, growing 6.41% YoY in January after slumping in mid 2019 from the onset of the Hong Kong unrests.

Investment Action

Maintain the Singapore Banking Sector at Overweight. Despite price weakness in the banking stocks with recent sell-off on growing fears from the Covid-19 outbreak as well as the subsequent surprise rate cut by the Federal Reserve, we feel that the banking stocks remain attractive.

The 3 local banks turned in a set of strong earnings for 4Q19 and while FY20e growth hinges more on outlook of non-interest income given pressures from both loans growth and NIM compression, their improved capital positions provide a bolster to external shocks. The guidance of future dividends also provides investors with improvement to current yields.