There were two key developments that took place last night relevant to the Singapore banks sector. One was the release of further property measures by the Singapore government after midnight, targeted to cool the private residential and HDB resale markets and takes effect on 16 December 2021. Key measures announced include higher additional buyer’s stamp duty (ABSD) rates and tighter total debt servicing ratio threshold (TDSR: lowered from 60% to 55%). The loan to value limit for HDBs (housing development board) will also be raised from 85% to 90%, while increased housing supply will be made to cater to demand. This marks the first set of cooling measures since 2018.
Limited impact likely for Singapore banks from property cooling measures: For the Singapore banks, while the latest cooling measures could weigh on mortgage growth next year, we believe the sector benefits from other growth drivers supported by the ongoing global recovery and do not expect a similar scale of impact seen from the 2013 implementation of TDSR of 60%. Mortgages have reduced in significance as a driver of incremental sector loans growth for the Singapore banks over the past years, with the segment contributing about 29.3% of Singapore’s system loan book as of 1H21, which has declined from 2018’s~ 30.4%. At the same time, Singapore banks have been benefitting from loans growth in other segments such as trade and non-trade corporate loans. Within the sector (research comments restricted on OCBC), DBS Group Holdings (fair value SGD34) has a larger domestic mortgage loan book (~SGD77mn, ~19% of its overall loan book of SGD404mn) relative to United Overseas Bank’s (fair value SGD32)~SGD69mn, ~23% of its overall loan book of SGD299mn) in terms of absolute amount but a lower percentage in terms of exposure within its loan book, as per 1H21 disclosures.
The other piece of development last night was more positive for the sector, and underscored our positive stance on global and Singapore banks over the past year and prior calls to accumulate quality recovery ideas since the pandemic selloff bottomed out in late March 2020. The Federal Reserve announced that it would hasten the pace of scaling back its asset buying program earlier and signaled rates could increase in 2022 at a faster pace than expected. Latest projections showed Fed officials now expect 3 quarter point increases in the federal funds rate next year, which is not expected to start before the tapering process ends.
Constructive stance maintained with higher interest rates expected over the medium term: Our house has updated our macroeconomics forecasts and now expect the FOMC to lift rates by 25bps from June 2022 and hike once every quarter until the Fed funds rate reaches 2.25-2.5% in 2024E. We retain our call for risk assets to be supported given a calibrated pace of Fed rate hikes and continued economic recovery expected, and reiterate our positive stance on the banks and Singapore equities. We are maintaining our loan growth assumptions (single digit growth expected for FY22E for the two Singapore banks under research coverage) and do not expect the banks to make material revisions to their recent mid-high single digit loans growth guidance for FY22E, as we see continued macro recovery feeding through next year, which should translate to support for business loans growth as regional economies re-open further (barring unexpected developments from Covid-19 mutants) while faster than expected Federal reserve rate hikes should also benefit the banks’ net interest margins and net interest income over the medium term.
Keeping an eye out for potential wealth taxes in Singapore, amongst other macro risks: Key risks for the sector include slower than expected rate hike increases, deterioration in the macro environment from Covid-19 mutant resurgence and sentiment impact from potential wealth taxes if imposed in Singapore – which could potentially come in the form of higher property and capital gains taxes and could serve policy objectives of both broadening Singapore’s tax revenue base and addressing social policy goals, although our base case is that should any wealth tax be imposed, authorities are likely to take a balanced and progressive approach in view of Singapore’s wealth and family office hub development goals.