Doubts over whether US reflation boost will lift S'pore banks

Singapore

THE reflation boost for Singapore banks remains a question, even as the US Federal Reserve expectedly lifted interest rates by 25 basis points this week.

For one thing, hopes of higher loan pricing by the Singapore banks must be tempered when weighed against heightened competition for top-tier customers. Analysts also pointed to unknowns over the issue of future rate hikes, as the market is also awaiting more details on US fiscal policies meant to boost growth.

"Singapore banks are in no man's land," said a report this week from Jefferies. It met Hong Kong-based investors this month, and had discussions on the Singapore market that were focused on the banks.

"The camp is split between reflation-believers and investors looking to underweight banks on stretched valuation and unexciting margin outlook." said the brokerage.

On its part, Jefferies believes that with weak domestic private consumption, lower annual job growth than the historical trend, as well as high leverage, it is likely domestic rates will stay low and uncorrelated to US-dollar (USD) rates, amid ample Singdollar (SGD) liquidity.

The benchmark rates - on which loans are priced - reflect movements in the SGD. Singapore controls its monetary policy by managing the SGD exchange rate against a basket of currencies.

"Further, with higher commodity costs, SGD depreciation stance against USD may be limited or else imported inflation will be amplified. On balance, this group of investors holds the view that unless external growth permeates in Singapore, local rates will be capped," Jefferies added.

Banks themselves are expecting, at best, stable net interest margins in 2017, flagging higher competition in lending to top corporates.

OCBC economist Wellian Wiranto also pointed to the uncertainty in predicting rate hikes ahead.

"Don't get too excited - that appears to be the key message from the Federal Open Market Committee's (FOMC) meeting," he said in a note on Thursday.

"FOMC did not signal - much less commit to - a more hawkish path of hikes for the rest of the year. Given the big unknowns, it is wise for the Fed to refrain from over-promising on hikes, as per before. Details of Trump's economic policies are still scarce and the feel-good factor boosting US economy might not last."

Still, Fitch Ratings said the decision to raise the Fed Funds target rate to a range of 0.75 per cent to 1 per cent, marks the second rate hike in just over three months - a "major acceleration" in Fed action. It expects a total of seven hikes in 2017 and 2018, bringing the policy rate to 2.5 per cent.

"Jobs data this year have been supportive, with the latest non-farm payrolls, unemployment and private sector earnings figures all pointing to tightening labour market conditions," it said. "Material fiscal easing should bolster positive domestic demand trends."

Citi said the recent GDP data suggests that Singapore banks no longer deserve "recession" valuations noted at the end of last year, even though first quarter results may remain soft.

"We remain positive: US reflation is a multi-year theme: if global interest rates normalise over three to four years, developed-market banks, including those in Singapore, will enjoy a secular lift to ROEs (returns on equity)," it said in a report this week.

Economists have indicated they would raise their growth forecasts for the Singapore economy.

The Monetary Authority of Singapore (MAS) said this week the latest survey of private-sector economists suggests the Singapore economy is likely to grow by between 2 and 2.9 per cent this year, above the earlier 1 to 1.9 per cent range.

Economists will watch if the pains in the labour market here have bottomed out, carried through by stronger growth in the manufacturing segment.

The jobless rate in Singapore hit a six-year high in 2016 as layoffs spiked and job vacancies fell, according to numbers reported this week. In the fourth quarter, the jobless rate among residents rose to 3.2 per cent from 2.9 per cent in the third quarter.

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