Higher interest to boost Singapore banks' operating leverage

Singapore banks can rerate further.

It has been noted that Singapore banks, which are trading close to their mean valuations, can rerate further, as increases in short-term interest rates become more pronounced.

According to a research note from Nomura, Singapore banks benefit from higher short-term interest rates as their assets get repriced faster and by a bigger magnitude compared to their liabilities.

Both the inter-bank rate and the SWAP rate are up with the inter-bank rate 39bp higher than last year and the SWAP rate by 62bp. The SGD loans are typically pegged to these rates.

For example at DBS, 40% of its SGD loans are linked to the inter-bank rate and 40% to the SWAP rate.

Here's more from Nomura:

We estimate a 100bp increase in interest rates could boost ROEs by an average of 140bp. Our top pick is DBS.

Banking sector theme - Singapore banks are prime beneficiaries of higher short-term interest rates as their assets get repriced faster and by a bigger magnitude compared to their liabilities. We expect robust stock performance 2-3 quarters prior to rate changes.

Country macro comment - We project GDP growth of 2.7% in 2015 versus 2.9% in 2014. This reflects ongoing labour market tightening, less synchronized global GDP growth, construction investment growth slowing further as the residential property market continues to soften , and still weak private consumption growth as higher interest rates raise household debt servicing burdens.