Singapore banks set for 11% earnings rebound next year

Thanks to an estimated 8-10bps rise in net interest margins.

With rate hikes almost a certainty in the coming quarters, the Singapore banks are almost surely to deliver higher net interest margins (NIM).

The research house imputed 8-10bps rise in NIM for FY17F. Its sensitivity analysis suggests that every additional 25bps increase SIBOR/SOR translates approximately to a 6bps increase in NIM (ceteris paribus), and will lift earnings by another 4%.

Loan growth however, it says, will likely remain sluggish, limiting net interest income growth.

Here's more from DBS Vickers Securities:

After years of waiting, interest rates are finally on the rise, hopefully on a sustainable basis. Taking the cue from a possible rate hike in Dec 2016, we believe this should revive NIM expansion catalyst for the Singapore banks.

Our house view expects one hike in Dec 2016 and subsequently four more hikes (one per quarter) in 2017. Approximately 40-50% of the Singapore banks’ loan books are SIBOR and SOR based.

Assuming funding costs stay low and constant, this would imply that a 25bps increase in SIBOR/SOR (assuming similar quantum collectively) would lift loan yields by 7bps.

Our interest rate strategist is expecting SIBOR to hit 1.2% by end-1Q17 and additional 20bps per quarter subsequently, following the trends of the Fed rate hikes.

Taking this into account, we have imputed 8-10bps rise n NIM across the banks, resulting in earnings uplift by 6-10%.

This also implies that earnings growth for 2017 would now be 11% (FY16F: -3%).