Loan growth and stable asset quality to bring modest growth for Singapore banks

NIM direction and dividend yield will be its key driver for the new year.

Singapore banks will see modest growth in 2020 buoyed by a 4-5% loan growth and stable asset quality, although profits could stay “largely” flat, reports OCBC Investment Research (OIR).

A key driver for bank sector earnings is said to be its net interest margin (NIM) direction, where two-thirds of banks’ total income is derived from net interest income.

“Whilst the sector’s net interest margin should continue to reflect the lagged pass-through from last year’s Federal Reserve interest rate cuts in the upcoming quarters, concerns over NIMs compression may ease later this year assuming the current base case of a pause in Federal Reserve interest rate remains unchanged,” OIR stated.

Non-interest income growth momentum has been a silver lining supporting the bottom line for the sector, and is projected to continue aiding growth this year. Asset quality trends are expected to remain benign (sector NPL ratios ~1.5-1.6%) with little risks, whilst banks are wary of degradation in asset quality.

Also read: Credit costs to weigh on Singapore banks in 2020

Dividends are also expected to provide some support to the sector as it will likely to remain stable with an average of around 5% forward yield.

“[A]lthough further comments could be made on the possibility of higher capital payout given high capital ratios. As of end September 2019, CET1 ratios of DBS and UOB are 13.8% and 13.7% respectively, above previous indications of optimal range of 12.5% to 13.5%,” OIR noted.

In terms of valuations, banks last trade at around 1.2x price per book, in line with past ten-year historical average multiple.