Mortgages predicted to disappoint.
As the year comes to a close, analysts are becoming more confident of impressive loan growth for Singapore banks in 2014--all thanks to the GDP recovering nicely and positive forecasts for global economics.
However, this rosy outlook does not come without the thorns. Singapore Business Review made channel checks with analysts to find out what could hamper Singapore banks’ loan growth.
Lim Sue Lin, analyst, DBS Group Research:
While the banks have generally guided for high single digit loan growth for 2014, banks are proxies to the GDP recovery. There is room for upside surprises given the positive outlook on the global front which should bode nicely with Singapore’s GDP growth outlook.
What could dampen loan growth trends would be significantly softer mortgage growth (mortgages comprise 30% of total loans as at Sep 13). We started 2013 with a relatively bearish view, projecting 8% loan growth but loan growth surprised in 1H13 and we believe it may end the year at 14%, that too assuming loan growth tapers off to about 1% q-o-q in 4Q13 (3Q13: 2% q-o-q). We are penciling in 10% loan growth in 2014.
Although mortgages are likely to soften in 2H14 (mortgages comprised 30% of total loans as of Sep 13), domestic business loans and trade finance loans (largely US$) may continue to thrive given strong GDP growth prospects and improved external environment.
Stronger-than-expected business loans could provide a boost to overall loan growth in 2014. Every 1ppt increase in loan growth would lift earnings by 0.8%. NIM uplift would give greater ammunition to earnings.
NIM could start to inch up in 2H14 as credit spreads are expected to widen and we do not have to wait for an upswing in the interest rate cycle. As it is, banks have started to price up credit spreads but it will take a couple of quarters before the impact is felt on NIM.
Separately, we also note that banks have been submitting higher SIBOR numbers since October. SIBOR is currently at 40bps (from a low of 37bps). In any case, expectations of higher rates in the US are gradually seeping in.
In the event of an interest rate cycle revival, there would almost certainly be an upswing in NIM and earnings. Judging
from the vibes of non-QE tapering, a significant hike in Fed Fund rates and hence SIBOR may still not be in sight. Based on our sensitivity analysis, every 10bps rise in NIM will lift earnings by 4-6%.
Ng Wee Siang, analyst, Maybank Kim Eng:
With the odds of the US Federal Reserve tapering its quantitative easing programme on the rise, interest rates are set to rise. The implications will manifest in banks’ net interest margin (NIM), asset quality and loan growth. In this report, we conduct a sensitivity analysis on earnings assuming a 1ppt change in loan growth, a 5bps rise in NIM and a 5bps increase in credit charge (as a proportion of net loans).
Based on our estimates, every 5bps increase in NIM will raise FY14F-15F EPS of our universe by 4% on average. The earnings uplift is significant after the past few years of depressed NIMs. We believe DBS would benefit the most compared to its peers, given its strong deposit franchise. However, we would add that banks’ earnings are much less sensitive to a change in loan growth in the year the loans are disbursed because the additional interest income earned or lost will substantially be offset or cushioned by additional or lower collective impairment to be set aside as required by the regulators.
The earnings impact ranges from 2.5% to 3.1%, with a slight variation from bank to bank. As a proportion of average net loans, our universe set aside an average credit charge-off of 24bps in 2012, the lowest since 2006. We expect credit charge-off to rise to 27bps in 2013 and 30bps in 2014, before improving to 28bps in 2015.
Sharnie Wong and Chen Wang, analyst, Barclays Research:
Heading into 2014, we believe investors should position themselves defensively in Singapore banks that have a strong deposit franchise (in case of system fund outflows) and also those which are most leveraged to rising interest rates.
Interest rates in Singapore tend to closely track US rates. We believe Fed tapering and tightening could affect margins of the banks, system liquidity, deposit competition, loan growth, asset quality, and property prices, while our global asset allocation team believes there is a risk that Fed tapering and tightening occur earlier than the market is pricing in.
Our global asset allocation analyst, Jim McCormick, believes the risks of an early beginning for Fed tapering have risen (current estimate from the US economics team is for March 2014) with the recent improvement in US payrolls and also the tone of the latest Fed minutes.
Another strong US payroll report on 6 December could well seal the case for an early start. Moreover, he believes the market may have pushed out the time gap between the start of tapering and the first Fed tightening a little too far.
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