MAS tightening to bolster Singapore banks' performance

Banks are set to benefit from rising loans which grew 10%, as well as higher SGD and USD interest rates.

According to Jefferies Singapore, banks are poised to perform well after the Monetary Authority of Singapore decided to raise the slope of the S$NEER policy band slightly, from 0% previously.

Analyst Krishna Guha noted that a reflation outlook should benefit bank performance. "System loans grew 8.5% YoY with business lending growing at 10% as of February 2018. Annual GDP growth of 4.1% in 1Q2018 implies about 2x multiplier. SGD and USD interest rates are rising in tandem. The average 3M SIBOR and LIBOR for 1Q2018 rose 21 and 39 bps YoY respectively," he said.

However, the team at BMI Research is less optimistic about economic growth. "We expect growth to likely moderate over the coming quarters amid a slowdown in the manufacturing sector. Our sentiments have been echoed by the MAS, which noted that ‘the sectoral composition of growth has been uneven’ and that ‘the pace of [global] expansion could slow slightly as the cyclical upturn matures’," it said.

Guha noted that historically, policy tightening has led to the outperformance of financials. "Since 2000, there have been two tightening cycles (April 2004 to Oct 2008 and April 2010 to April 2016) where S$NEER policy slope has been appreciating. These periods have seen a strong increase in share price performance of banks," he said.

"For example in 2004, DBS rose 8% within first three months of policy tightening. Property developers have a lagged effect - they underperform within first three months but outperform the banks over one-year period. In 2004, FSTREH Index was unchanged in the first three months but delivered 45% within 12 months of policy tightening. Though banks and local developers are up more than 20% over past 12 months; strong growth and optimistic market sentiment should sustain the performance," Guha added.

The analyst said that balance sheet expansion through trade, infrastructure and mortgage, loans and higher non-interest income should grow by high single digit for the full year. "Along with the decline in credit costs, earnings are expected to grow mid-to-high teens. We have also discussed the possibility of expansion of multiples for banks as payouts increase and dividend yields exceed that of the index," he added.