RHB Bank Singapore has maintained its “neutral” stance for Singapore banks after the US Federal Reserve (Fed) lowered its rates by 50 basis points (bps) on Sept 18. Among the banks, DBS Group Holdings remains the team’s top pick for capital management with a target price of $41.40. Amidst “flattish earnings” and as the interest rate cycle turns, RHB turns their focus to dividend yields and dividend per share (DPS) growth.
Following the rate cuts, RHB is maintaining its earnings forecast but expects the sector’s profit after tax and minority interests (PATMI) for FY2024 to increase by 6% y-o-y, supported by mid-single-digit operating income growth and stable credit costs. However, RHB expects that FY2025 PATMI will remain flat, amidst net interest margin (NIM) compression and moderation of non-interest income (non-II) growth.
Before the Fed began its rate cuts, all three Singapore banks have already been taking active steps to protect their net interest income (NII) by hedging and adding duration and fixed rate assets to their portfolios, to mitigate the impact. As such, NII sensitivity is now lower than it was at the beginning of the rate hike cycle, notes RHB.
According to recent briefings, Singapore banks guided for an NII sensitivity of approximately $4 million - $5 million per bps change. DBS and UOB guided for NII sensitivity of approximately 3% and 7% impact to profit before tax (PBT) for a 100bps change in rates on a full-year basis, respectively. In comparison, DBS’s previous sensitivity was around $18 million - $20 million per bps in 2021.
RHB is of the view that global growth remains intact and the impact from a rates normalisation cycle on NIMs could be further supported by “potentially improved loan volumes and wealth management opportunities.” RHB adds that lower rates could help ease asset quality pressures resulting in lower credit costs.
Looking ahead, RHB has identified the upside risk to earning as better-than-expected loan growth and non-II alongside lower-than-expected credit costs, while downside risks include NIMs pressure and weaker-than-expected other non-II, particularly on treasury and market fronts.
See also: RHB initiates coverage on CSE Global with ‘buy’ call with TP of 58 cents.
Larger-than-expected cuts
According to RHB, the 50 bps cut on Sept 18 exceeded its expectation of a 25 bps reduction. That said, share prices of the banks under the brokerage’s coverage have “held up well”, suggesting that the cuts are likely to have been priced in.
RHB Global Economics & Market Strategy (RHB GEMS) has revised its view on the Federal Fund Rates (FFR), expecting a further 25 bps cut in November and December. This is a change from their earlier view of a total FFR reduction of 50bps this year. This shift arises from the US Fed’s “language and economic projections”, RHB says. However, RHB states that this does not necessarily indicate a change in global growth assumptions and was not made amidst a recessionary backdrop.
RHB expects the Monetary Authority of Singapore (MAS) to keep its policy parameters unchanged for 2024.
