Banks' NIMs to degrade after US Fed's surprise rate cut

DBS and UOB guided declines of 5-7bps.

Singapore banks’ net interest margin (NIM) are likely to decline given the US Federal Reserve’s (Fed) surprise 50bp interest rate cut in March, according to a DBS Equity Research report.

The sector had previously guided for various magnitudes of NIM shrinking. DBS premised ~7bps on one Fed rate cut assumption in June 2020. For OCBC, NIM will remain above the 1.70% level posted in FY2018, whilst UOB guided a marginal NIM decline of ~5bps.

Analyst Rui Wen Lim believes there will be further SIBOR/SOR downturns after the Fed cut, coupled with Hong Kong’s rate cut.

“While impending decline in cost of funds will cushion decline in loan yields, we believe overall NIM will still see further pressure, resulting in our negative earnings revision of 1-2% through FY20F across the sector on 1-2bps NIM reduction,” Lim said.

Sector earnings will likely dip around 6% in FY2020 and NIM will decline by six to nine bps across the banks, Lim added. The ongoing competition in mortgages and flight to quality loans will flatten loan yields even more.

“Our sensitivity analysis indicates that every 25bp decline in interest rates that reprices the S$, HK$ and US$ books collectively would result in NIM decline of c.1-3bps with a corresponding 1.0-2.5% decline in net profit across the Singapore banks,” Lim said.