Singapore banks: the largest rate hike beneficiaries in the ASEAN
Global markets have become volatile amid inflationary pressures and tighter monetary conditions. Inflation has also started to hurt Asia markets, with central banks starting to take the direction of the US Fed. However, despite market volatility, we are finding investment opportunities in certain parts of Southeast Asia, particularly those that benefit from the current macroeconomic backdrop.
One of them is Singapore’s banking sector, which we view as the largest rate hike beneficiaries in Southeast Asia. As Singapore tends to track the Fed fund rate direction, the banks’ interest rate margins (NIM) may be bolstered. While other ASEAN countries would see the same direction in rates as the US, the magnitude of hikes would trail Singapore. The Lion City is expected to have five-six rate hikes this year, which compares with just three in other ASEAN markets, such as Indonesia and the Philippines.
Singapore’s banking sector is also supported by loan growth on the back of the reopening of the economy. Singapore’s three largest banks saw their loans grow 8-9% YoY, according to their earnings results1. As some banks have huge business exposure to the ASEAN, the healthy growth in loans is expected to continue on the back of the region’s reopening and expected boost in infrastructure spending. Some banks also have higher exposure in China, which should benefit them from China’s economic recovery.
In terms of valuations, Singapore banks remain attractive, with an average price-to-book (P/B) ratio of 1.2x, which continues to lag behind pre-Covid levels. They also have good dividend yields of about 4.5-4.9%2. Against the favorable macroeconomic backdrop of Singapore, the banks’ operating outlook should be positive, and we expect valuations of Singapore banks to rerate in the second half of the year.
Overall, Singapore continues to enjoy favorable macroeconomic fundamentals on the back of its reopening and economic recovery. During the first quarter, the economy grew by 3.7% YoY in the first quarter, which was in line with market expectations, according to data from the Singapore Department of Statistics3. Meanwhile, manufacturing production continued to advance by 6.2% YoY in April, beating market estimates of a 5.1% rise4. Furthermore, as the country fully reopened its borders to all vaccinated visitors in April, together with the continued expansion of the manufacturing sector, the government expects the real GDP to grow by 3-5% in 20225.
- S&P Global, 12 May 2022
- Bloomberg Terminal, 24 June 2022
- Singapore Department of Statistics, 25 May 2022
- Singapore Department of Statistics, 26 May 2022
- Singapore Ministry of Trade and Industry, 26 May 2022
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