SIBOR to buoy banks from slow home loan growth

Every 10bps rise in the SIBOR could offset a 1ppt slowdown in loan growth.

Whilst the US-China trade war and the Singapore Government’s property cooling measures could slow loan growth, a rising US federal funds rate (FFR) and a firmer SIBOR will widen banks’ net interest margins (NIM), RHB Research said.

RHB Research analyst Leng Seng Choon noted that the 3-month SIBOR has risen to 1.63%. "We did a sensitivity analysis which examined the likely impact on earnings from a 10bps rise in the SIBOR, as well as a 1ppt fall in loan growth. Our conclusion is that a 1ppt slowdown in loan growth would be offset by a 10bps rise in the SIBOR," he said.

This means the impact of the Singapore Government’s property cooling measures would be offset by the expected increases in the SIBOR over the next few quarters.

Leng noted that UOB is a beneficiary of rising FFR and said, "UOB’s management indicated its intention to lower CET1 CAR, and we see this translating into higher dividends, which could catalyse its share price higher."

He forecasted the bank's NIM to widen to 1.97% by 2020 from 1Q2018's 1.84%. He noted that the return on equity improved (ROE) to 11% from Q4's 9.8% and the bank is guiding for 12% in end-2019.

DBS' earnings are also expected to improve the most from every 1 bp rise in the SIBOR. "Whilst the ongoing trade war between the US and China could slow DBS’ loan growth (more than peers), we believe the rise in the SIBOR could offset the negatives," Leng said.

The analyst noted that when FFR rose over 5% from 1% in the upcycle between mid-2003 and mid-2007, DBS' price-to-book ratio rose as high as 1.9x from 1.04x.

For now, however, loan growth is expected to dampen and hit mid-to-high single digit for 2018 to 2020.