Singapore Banks Big Picture - Thoughts on Interest Rates and Margins Outlook

Tightening unlikely until 2010: The recent bond sell-off saw SGD 10-year prices fall 18% into mid-June, 10-year yields rising to 2.8% (end-June 2.6%), while short-term SGD rates remain near record lows. Our economists view this sell-off as overdone with limited inflation fears and the US Fed unlikely to tighten until well into 2010E. Low short-term rates hurt margins for DBS (less so for OCBC, UOB), but rising lending spreads and higher loan growth should add to DBS' margins as we progress through the year. Top pick remains DBS on relative valuation.

DBS most sensitive to rates changes: While a positive sloping yield curve implies gapping opportunities for all 3 banks, historic trends show persistently low short-term rates hurt margins for DBS (see Figure 1), due to a low LDR and higher holdings of low-cost CASA funds. We think the recent 18% fall in bond prices implies AFS (book value) adjustments rather than any direct earnings impact.

GDP recovery swifter than expected. With IP rising 1.2%yoy in the Apr-May period, Citi Economist Kit suspects 2Q09 advance GDP estimates could come in close to minus 4%, with a qoq saar jump in the high teens, reversing the 14.8% qoq saar plunge in GDP in 1Q09. Continued positive momentum in May NODX may suggest upside risk to our base case of Singapore coming out of recession by 4Q09.

May-09 monetary data. Domestic lending rose marginally (+0.3%mom, +5.5%yoy) to S$271bn. Weaker business lending (-0.1%mom) was offset by stronger consumer lending (+0.5%mom) on steady mortgage growth. Loan-to-deposit ratio fell to 74.3% as total deposits rose by 0.5%mom to S$365bn (+9%yoy).

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