Singapore Banks - DBS Research 2023-10-16: What Could Surprise Beyond 3Q Results?

• Net Interest Margin (NIM) to continue showing divergence. Net Interest Income (NII) supported as rate cuts are pushed further out. Intensifying competition amidst weak loan demand could start to erode loan yields beyond 3Q23.
• Fee income and asset quality to remain largely stable in 3Q23.

NIM to continue showing divergence; NII supported as rate cuts are pushed further out.

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• We believe OCBC and UOB should see largely stable q-o-q NIMs for 3Q23 as funding pressures persist alongside July’s 25bps Fed hike. With rate cuts being pushed further out, DBS Group economists now only expect four rate cuts in 2H24, which should support NII for longer.

Intensifying competition amidst weak loan demand could start to erode loan yields.

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• While there were further 25bps rate hikes in May and July 2023, which should support loan yields during 3Q23, we believe that intensifying competition amidst weak loan demand could start to erode loan yields from hereon, especially for mortgages and high-quality corporate loans.
• Notably, fixed mortgage rates continued to decline from a peak of 4.25%- 4.50% (two to 3-year fixed) in 4Q22 to near 3% in recent weeks, as local and foreign peers continued to lower their interest rate offerings. These are now significantly lower than the 3M SORA compounded rate of 3.7%, which is commonly used as a benchmark rate for mortgage loans, thus reflecting the competition dynamics as liquidity remains flushed in the system.

3Q23 should see less funding pressure, as marginal fixed deposit interest rates declined, though they have started to pick up in October.

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Rui Wen LIM DBS Group Research | https://www.dbs.com/insightsdirect/ 2023-10-16 SGinvestors.io

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