Singapore banks get bump as Fed signals earlier rate hike: report

INVESTORS have begun pricing in premiums for interest rate hikes reflected in Singapore banks' loan margins, since the rerating cycle for the local trio typically begins four to five quarters ahead of the actual rate hike, said CGS-CIMB in a report.

Buying momentum should continue in the coming third quarter on the reflation trade. This comes as Singapore banks have risen about 13 to 17 per cent year to date to outperform the Straits Times Index by 4 to 8 per cent.

"We think the increasing pace of Covid-19 vaccine roll-outs across the region, as a gauge of a timeline to regional economic reopenings and hopes of credit cost write-backs in FY2021, contributed to the rest of the share price optimism," said CGS-CIMB on Wednesday.

The brokerage is expecting net interest margin upside as early as FY2023 amid the US Federal Reserve's signal on sooner-than-expected rate hikes.

Just two days after the Fed signalled last week for at least two interest rate hikes by end-FY2023, St Louis Fed president James Bullard said he sees an initial rate hike happening as soon as late FY2022, in expectation of inflation picking up faster than expected.

While the Fed would only raise interest rates on the back of maximum employment and persistent 2 per cent inflation, Mr Bullard views the strengthened economy and corresponding inflation forecasts of 2.5 to 3 per cent through to FY2022 in the US as not merely transitory.

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For Singapore banks, this implies a possible rerating cycle as early as Q2 to Q3 this year, in case hikes start in FY2022.

CGS-CIMB has kept its overweight rating on the sector - staying invested to "reap the economic rebound ahead" as social distancing measures are eased across the region, while share price momentum from rate hike expectations sets in.

UOB is its top pick among the trio; the bank is a "key beneficiary" of Asean economic reopenings, which should close its valuation gap with peers given investors' concerns on asset quality.

Meanwhile, the Monetary Authority of Singapore is due to announce its decision on whether or not to lift its dividend cap on banks before the upcoming second-quarter results.

While current conditions are ripe enough to expect dividend restrictions to be eased, there may be some profit-taking, said CGS-CIMB.

A key downside risk is asset quality deterioration as a result of prolonged economic closures.

On Thursday, DBS closed up 17 Singapore cents to S$29.50, while OCBC ended flat at S$11.81. UOB shares traded 3 Singapore cents lower to finish at S$25.67.

READ MORE:

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