Singapore banks may face earnings headwinds as falling Singapore Overnight Rate Average (SORA) rates and anticipated U.S. rate cuts pressure net interest margins (NIMs), warns Citi Research analyst Tan Yong Hong.
Despite stable U.S. rates, SORA has dropped due to Monetary Authority of Singapore (MAS) forex interventions and high banking liquidity. On March 10, spot SORA fell to 2.15%, signaling further downside risks. Singapore dollar short-term rates have historically tracked 60% of U.S. rate changes, but MAS policies have increased this transmission effect in the current rate cycle.
Impact on Singapore’s Three Major Banks
Tan highlights DBS Group Holdings (DBS), Oversea-Chinese Banking Corporation (OCBC), and United Overseas Bank (UOB) as potentially vulnerable, as lower NIMs could impact earnings. Fixed deposit rates have already fallen by 40 basis points, with cost reductions expected to reflect in 2QFY2025.
- OCBC appears to have the most realistic outlook, predicting three U.S. rate cuts, compared to DBS’s estimate of two and UOB’s forecast of one.
- UOB’s NIM is expected to fall to 1.95% in FY2025, below the 1.99% market consensus, leading to earnings projections 5%-9% below estimates from FY2025 to FY2027.
- OCBC’s FY2025 NIM is forecasted at 2.09%, aligned with market expectations, while earnings estimates are 0%-4% below consensus.
- DBS remains the most resilient, with 60%-70% of assets hedged at fixed rates, though its FY2025 NIM is estimated at 2.06%, slightly below the 2.08% consensus.
Downgrades and Adjusted Target Prices
Tan downgraded UOB to “neutral” from “buy”, lowering its target price from $42.30 to $36.90, citing the highest earnings risk among the three banks.
While maintaining “buy” ratings for DBS and OCBC, Tan cut their target prices:
- DBS: $49.30 (from $50.20)
- OCBC: $16.30 (from $17.20)
Additionally, Tan removed his 90-day positive catalyst watch on DBS, citing potential near-term volatility. However, he noted that DBS’s 7% dividend yield and ongoing share buybacks should provide some support.
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