Higher rates for Singapore banks offer huge operating leverage

Analysts believe they can rerate further.

Singapore banks are prime beneficiaries of higher short term interest rates as their assets get repriced faster and by a bigger magnitude compared to their liabilities.

According to a research note from Nomura, Singapore banks, which are trading close to their mean valuations, can rerate further, as increases in short-term interest rates become more pronounced. They benefit from higher short-term interest rates as their assets get repriced faster and by a bigger magnitude compared to their liabilities.

Both the inter-bank rate and the SWAP rate are up with the inter-bank rate 39bp higher than last year and the SWAP rate by 62bp. The SGD loans are typically pegged to these rates. For example at DBS, 40% of its SGD loans are linked to the inter-bank rate and 40% to the SWAP rate.

Nomura estimates a 100bp increase in interest rates could boost ROEs by an average of 140bp.