Singapore banks on downward spiral after US Fed cuts rate to nil

Loan yields are sighted to decline due to the lower benchmark rate.

Singapore banks’ net interest margins (NIMs) and asset qualities are expected to deteriorate further after the US Federal Reserve slashed interest rates by 100bps to 0-0.25%, according to DBS Group Research.

The fed cut pushes down OCBC’s and UOB’s NIM forecasts by a further 8bps and 5bps, respectively, said DBS Group Research analyst Rui Wen Lim. The two banks face negative earnings revisions of c.8% and c.7%, reflecting lower cost of deposits which are unlikely to offset lower loan yields.

“We believe that [OCBC’s and UOB’s] NIMs will decline as loan yields re-price on a lower benchmark rate, though re-pricing may not be immediate. Against a slower growth backdrop, we believe loan yields may continue to compress due to flight to quality loans,” Lim added.

The report further noted the big three Singapore banks’ net profits will decline by a corresponding 1-2.5% for every 25bp decline in interest rates that re-prices the Singapore, Hong Kong, and US dollar books collectively. In the same scenario, NIMs are expected to decline 1-3bps for every 25bp decline in interest rates.

OCBC’s and UOB’s credit costs are now expected to come at 33bps (UOB) and 36bps (OCBC).