• Singapore’s listed banking trios have outperformed the STI so far, posting an average total returns of 10% YTD on the back of S$1.0 billion net institutional inflows. Potential rate hike cycle in focus, acting as tailwinds for banks’ stock performances.
   
• The Banks trios historical stock performances largely mirrored previous rate cycles, with an average 35% gains in the last rate hike cycle (2017-2018). Expectations of a new cycle have lifted stock performances in the past two months.
   
• Upcoming FY2021 results announcement coming in mid Febuary. Expect investors’ focus on the trajectory of net-interest income (NII), loan growth amidst re-opening of regional economies and fees income.

Singapore Banks Trio Gained 10% YTD and Near 52-Week Highs

The three Singapore banks posted an average total returns of c. 10.0% in the YTD (as of 31 Jan 2022), outperforming the STI’s 4.1% and are amongst the strongest performing large-cap stocks in Singapore. (Note: The STI is the strongest performing index in Asia-Pacific and second strongest globally YTD)

All three banks (combined c. 45% weightage of the STI) are trading near their 52-week highs with DBS and UOB at 20-year highs. Institutions were also net buyers of these stocks, with an estimated S$1.0 billion in institutional inflows so far this year. Key drivers for the sector in recent months are likely to be increasing expectations of a rate hike cycle and re-opening of economies in the region.  

Next Rate Hike Cycle Imminent?

On 26^th January, the U.S. Federal Reserve concluded its Federal Open Market Committee (FOMC) meeting. While rates were held at near zero, a potential rate hike was teed up as the Fed stated it may soon raise the target Fed funds rate range on the back of inflation (well above 2%) and a strong labour market.

Market expectations on the pace of rate hikes have increased, with some economists expecting as many seven in 2022. U.S. 10Y T-bill yields have also rose to more than 1.8%, increasing from the lows of 1.357% in early Dec 2021. The next scheduled FOMC meeting will be on 15-16 March.

Stock Performances Largely Mirrored Previous Rate Cycles

In the past 10 years, Singapore banks stock price performances had largely mirrored previous rate cycles. Notably, in the last rate hike cycle from Dec ’16 through Dec ’18, the three banks averaged total returns of 34.6% and outperformed the STI’s 12.5% in the corresponding period. (Note: The Fed raised hikes 8 times (25bps each time) during the last cycle from December 2016 through December 2018). As expectations of a new rate hike cycle in 2022 to begin, the stocks averaged a 16.4% total returns in the past two months.

Source: Refinitiv, News sources

As of 31 Jan 2022

Upcoming FY2021 Full Year Results Announcement

Singapore banks will be announcing their results in mid Feb. The investment community will likely be focusing on the trajectory of net-interest income (NII), loan growth amidst re-opening of regional economies and fees income.

The trio’s CASA funding ratios have improved and are now at between 56% to 75% (as of 3Q21), higher than the range seen in the last rate hike cycle, which analysts have seen as potentially a tailwind for net interest margins. (Note: CASA ratio implies total current and savings account deposits as a percentage of total deposits. A higher ratio indicates that a bank gets access to funding at lower costs.)

As a reminder, DBS, OCBC and UOB reported respective 46%, 58% and 37% YoY net profit growth in 9MFY21. DBS highlighted that its first, second and third quarter net profits were the three highest in history. Combined 3QFY21 NII at S$5.17 billion, up from S$5.13 billion in 2QFY21 and up from S$5.07 billion in 3QFY20. NII comprised 57%, 54% and 64% of DBS, OCBC and UOB’s total income in 9MFY21.

For 3QFY21, DBS, OCBC and UOB respectively reported customer loan growth of 2%, 4% and 3% from 2QFY21. OCBC attributed the 4% QoQ customer loan growth to both consumer and corporate lending, which was broad-based across geographies.

DBS will report FY2021 results on 14 Feb, followed by UOB (16 Feb) and OCBC (estimated to be 23 Feb).

 Source: SGX, Refinitiv, Bloomberg (Data as of 31 Jan 2022). 2022 P/E, P/B, ROE and Div Yield from consensus estimates