Ready for the hike
? Higher CASA ratios of c.55-70% (vs. 43-60% in FY15-18) underpin our expectations of amplified NIM expansion (>10-14bp) in this rate hike cycle.
? 4Q21F earnings will likely be seasonally weaker as wealth and trading income slow. Benign credit costs and higher opex will be common features.
? We upgrade banks to Overweight with higher TPs. Strong capitalisation amid lower impairments paves way for c.12-21% yoy earnings growth in FY23F.
Factoring 6 quarter-point Fed rate hikes over FY22-23F
Meeting minutes from the Federal Open Market Committee meeting in Jan 22 revealed that the Federal Reserve now forecasts three interest rate hikes in 2022 and another three in 2023. With Singapore banks being key beneficiaries of a rising rate environment given the sensitivity of their portfolios to US dollar rates and the higher likelihood of the Fed rate hike cycle beginning in Mar 22 (vs. late FY22F as we earlier expected) in a more aggressive bid to fight persistent inflationary pressures, we see a clearer trajectory for NIM expansion and raise our estimates by c.2-13bp to c.1.46-1.68% in FY22-23F.
Amplified NIM expansion due to flush liquidity conditions
We highlight that flush liquidity conditions with Singapore banks recording c.55-70% CASA ratios (in 3Q21) compared to c.43-60% during the previous rate hike cycle over FY15-18 could result in amplified NIM expansion as relatively low funding costs sustain for the time being given the lack of need to compete for deposits. Lower LDRs of c.83-86% in 3Q21 (vs. c.83-88% in FY16-18) as a result of the sustained deposit inflows over FY20-21 allows headroom for stronger sequential loan growth before funding needs kick in. Hurdles that could derail the path of NIM expansion include a swift and significant outflow of CASA into FDs or other higher yielding products and a longer time taken for the pass-through of Fed rate hikes into NIMs beyond the c.6-9 months we have factored in.
4Q21F will feature seasonal weakness; key operating trends intact
We expect key operating metrics of steady loan growth (c.1-2% qoq), stable NIMs and broadly sustained fee income momentum to remain a continued feature of Singapore banks in 4Q21F, although PPOP could see some drag from weaker treasury income from softer financial markets, slightly lower wealth management volumes and an uptick in opex. On balance, we think that Singapore banks’ 4Q21F earnings will be softer qoq but stronger yoy. In this regard, UOB could pull ahead of peers given its relative PPOP stability.
Upgrade banks to Overweight; DBS as key beneficiary of rate hikes
From the previous rate hike cycle, we observed that valuations of Singapore banks peaked c.2 quarters before the Fed rates did (at 2.5% in Dec 18). With the Fed rate hikes in the upcoming cycle yet to begin, we believe that there is still share price upside beyond the banks’ peak valuations of c.1.4-1.7x P/BV as seen during the previous cycle. Our expectations are underpinned by the banks’ more robust funding profiles amid ample liquidity (higher CASA ratio, lower LDRs) and concerns over elevated impairments (management overlays of c.S$600m-1.3bn) behind us, paving the way for higher ROEs above the c.11-13% peak seen during the previous rate hike cycle.