Singapore Banking Monthly - Phillip Securities 2023-01-13: Interest Rates Continue To Climb

Singapore Banking Monthly - Interest Rates Continue To Climb

Singapore Banking Sector - Phillip Securities Research  | SGinvestors.ioDBS GROUP HOLDINGS LTD (SGX:D05) UNITED OVERSEAS BANK LTD (SGX:U11) SINGAPORE EXCHANGE LIMITED (SGX:S68) OVERSEA-CHINESE BANKING CORP (SGX:O39)
  • December’s 3M-SORA was up by 39bps m-o-m to 3.08%. 4Q22 3M-SORA was up 252bps y-o-y.
  • Singapore domestic loans grew 0.67% y-o-y in November, below our estimates, while Hong Kong’s domestic loans declined 3.02% y-o-y in November. CASA balance dipped slightly to 20.7%.
  • Maintain OVERWEIGHT.
    • We remain positive on banks. SG Banks (DBS, OCBC, UOB)'s dividend yields are attractive at 5% with upside surprise due to excess capital ratios. We expect bank NIMs to rise another 34bps in 4Q22.
    • SGX is another major beneficiary of higher interest rates.

3M-SOR and 3M-SIBOR continued to climb in December

  • Interest rates continued to increase in December. The 3M-SORA was up 39bps m-o-m to 3.08%, while the 3M-SIBOR was up 23bps m-o-m to 4.24%. The SORA m-o-m increase was 2bps lower than the previous month, but still the third highest on record, while the SIBOR m-o-m increase was 15bps lower than the previous month’s increase of 38bps.
  • The 4Q22 3M-SORA average of 2.68% was 125bps higher than its 3Q22 average of 1.43% and improved by 252bps y-o-y.
  • The 4Q22 3M-SIBOR average of 3.96% was 149bps higher than its 3Q22 average of 2.47% and improved by 352bps y-o-y.

Recovery of treasury income to boost SGX’s earnings

  • Treasury income dipped in FY21 and FY22 due to the low interest rate environment. However, we expect a rebound in treasury income in FY23e by at least 8%. Based on historical data, we can see that Singapore Exchange (SGX)’s treasury income is lagging behind the Fed Fund Rates. As a majority of SGX’s collateral balances (FY22: S$13.9bn) are placed in Fixed Deposits (FDs) with the tenure spread out, certain deposits are yet to matured and the interest rates have not been refreshed.
  • Nonetheless, moving into FY23 we should expect the treasury income to recover to pre-pandemic levels as they get placed into higher interest FDs.
  • For context, in FY20, SGX earned a yield of 98 basis points on collateral balances of S$13.7bn resulting in treasury income of S$135mil when the Fed fund rate peaked at 2.50%. Treasury income in FY22 was S$49mil, an average yield on collateral of only 36 basis points.

Singapore loans growth slowing down

  • Overall loans to Singapore residents – which captured lending in all currencies to residents in Singapore – rose by 0.67% y-o-y in November to S$816bn. This was below our estimate of mid-single digit growth for 2022 as the rise in interest rates started to be more fully felt by consumers.
  • Business loans grew by 0.43% y-o-y in November, as business loans dipped by 1.49% for the month. Loans to the building and construction segment, the single largest business segment, grew 2.64% y-o-y to S$171.4bn, while loans to the manufacturing segment grew 3.41% y-o-y in November to S$26.2bn.
  • Consumer loans were up 1.04% y-o-y in November to S$313.3bn, aided by strong loan demand in the housing segment. Housing loans, which make up ~70% of consumer lending, grew 3.97% y-o-y in November to S$222bn for the month.
  • Total deposits and balances – which captured deposits in all currencies to non-bank customers – grew by 6.36% y-o-y in November to S$1,719bn. The Current Account and Savings Account (CASA) proportion dipped slightly to 20.7% (Oct22: 21.1%) of total deposits, or S$356bn, as there was a move towards FDs due to the high interest rate environment.

Hong Kong loans growth dipped in November

  • Hong Kong’s domestic loans growth declined 3.02% y-o-y and 0.35% m-o-m in November. The y-o-y decline in loans growth for November was higher than the decline of 2.70% in October, while the m-o-m loans growth decline of 0.35% was 87bps lower than October’s loans growth decline of 1.22%.

Volatility rose as market sentiment turned

  • SGX's preliminary SDAV for December rose 10% y-o-y to $920mil, as market sentiment recovered slightly in the last month of 2022. The VIX averaged 21.8 in December, down from 23.3 in the previous month, and the DDAV rose 8% y-o-y to 0.92mil in December, but down 15.6% m-o-m from 1.09mil in November.
  • The top 5 equity index futures turnover saw a dip of 3.8% y-o-y in December to 13.4mil contracts, mainly due to the lower trading volumes of its FTSE China A50 Index Futures and Nikkei 225 Index Futures. Notably, the Nikkei 225 Index Futures grew 26.4% m-o-m to 1.26mil and the FTSE China A50 Index Futures dipped 17.9% m-o-m to 7.65mil.
  • For 2H22, SGX's SDAV was down 8% y-o-y as market sentiment remained subdued due to macroeconomic factors. However, 2H22 DDAV was up 10.8% y-o-y, due to a continued rise in risk management activities, which drove derivatives volume growth in FX and Commodities, as global markets responded to another round of rate hikes by major central banks and China’s recent reopening.

Investment Action - Maintain OVERWEIGHT

  • We remain positive on banks. Singapore banks (DBS, OCBC, UOB)'s dividend yields are attractive with upside surprises due to excess capital ratios. Stable economic conditions and rising interest rates remain tailwinds for the banking sector.
  • SGX is another beneficiary of higher interest rates.





Glenn Thum Phillip Securities Research | https://www.stocksbnb.com/ 2023-01-13



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