Investors remain wary on slowed loan growth in the region, CGS-CIMB Research

A recent CGS-CIMB Research showed that investors remain wary about slowed loan growth in the region, and that their concerns were centered around a Fed rate cut – that it could de-rate sector.

The report which said investors remain wary on slowed loan growth in the region summarised that Financial Services in Singapore Banks would remain Neutral with no change.

CGS-CIMB said that their recent Singapore strategy marketing tour saw investors finding their feet at more attractive entry levels after the 12-16% sell-down in May 2019, and that their concerns were centered around a Fed rate cut – that it could de-rate the sector. It added that the threat of virtual banks is low in near term and that Net Interest Margin (NIM expansion) remain optimistic for the 2nd Quarter of 2019.

Despite the slowed loan growth, the incumbents will offer stiff competition from virtual banks said the report.

“We think that virtual banks are not likely to threaten the primary lending businesses of DBS, OCBC and UOB in the near term given the need for significantly large funding and capital bases to cater for corporate companies’ needs and the time required to scale up their operations. The underserved pockets of the retail and SME segments (possibly weaker credit profiles) are likely to be Grab’s and other virtual bank applicants’ focus points given their capital constraints.

“The high bank account penetration rate in SG (98%) could also translate into stiffer competition from the incumbents, who already have digital platforms in place (DBS’s Digibank and UOB’s TMRW bank). We believe that the banking pie is large enough to be shared, with various players serving different segments.”

The report added that although weak sentiments will have an impact on slowed loan growth it remained hopeful for NIM rise.

“Investors remain wary on the slowed loan growth in the region and its corresponding effects on NIMs. To this end, we previously revised our expectations downwards to c.45% across the banks. We are optimistic of seeing further NIM expansion in 2Q19 from tailwind effects of the banks’ repricing exercises. That said, 2H19 earnings growth is likely to depend more on non-II performance, particularly wealth, and containing credit costs.”

The report noted that Basel IV is slated to come into effect beginning Jan 2022, but that the reforms are largely centre around standardising the calculation of risk-weighted assets to improve the comparability of banks’ capital ratios.

“We believe that the net impact on Singapore banks will be manageable. DBS expects its RWAs to increase by c.3% (S$8bn) on a pro-forma basis – barring any optimisation measures, this would reduce capital by c.40bp.”

The property cooling measures introduced by the Government on July last year to counter the euphoria in the property market is expected to have an impact on slowed loan growth. The new property curbs which increased stamp duties for developers is expected to halt their enthusiasm to shore up their land bank. This in return would have an impact on bank loan growth.

Mr Paul Ho, Chief Mortgage Consultant at iCompareLoan, said that despite slowed loan growth prospects following the property curbs introduced by the Government last year, Singapore is still an attractive residential market for investors.

Although the property market exuberance has been curbed to some extent with the property cooling measures introduced last year, Singapore as a property market investment destination still remains among the top – shoulder to shoulder – with other cities in the world like London, New York, Shanghai and Sydney.

“We have to be mindful that there is a lot of excess capital fluidity here and at 1.9 – 2 percent, Singapore has one of the lowest interest rates for home loans in the region,” he added.

The biggest gainers following the new property cooling measures is likely be owners of strata portfolio of offices and shophouses approved for commercial use. The property cooling measures affected almost all categories of buyers and is predicted to achieve its intended objectives of cooling demand and moderating price growth.

One report said investors looking for alternatives to park their money in the wake of property cooling measures, would divert their attention to the offices and shophouses markets as they are not subjected to this round of purchase or sales restrictions/encumbrances.

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