- Incipient unease over credit risks & slower loan growth from rising SIBOR/SOR unwarranted.
- Fatter NIMs should plug gap. Safety nets to protect loan quality.
- Maintain OVERWEIGHT with catalysts from higher interest rates. DBS our top pick, followed by UOB.
Some clients are apprehensive about the recent interest-rate spike, fearing that slowing loan growth and weaker credit quality could overwhelm fatter NIMs. While recent rate hikes could indeed weigh on loan demand, we estimate the incremental net interest income from a 50bp rate increase at 3-4x the potential revenue loss from a 1ppt shortfall in loan growth. And while banks may cut their loan-growth guidance during this results season, we expect 3ppt cuts to 4-5%, at most. Moreover, our loan-growth projections are conservative, at 7% for the year vs +9.5% last year. The Street is also not that aggressive, anticipating around 7-8%.
Asset quality shielded
Higher rates typically impair repayment ability. But we expect asset quality to be shielded by a string of macro-prudential and pre-emptive measures rolled out since 2009. Stress could start to emerge if the 3M SIBOR hits 3.5% in one fell swoop from 1%. In such an event, SME loans are most vulnerable, given their smaller balance sheets. But the saving grace is banks’ proportions of unsecured SME loans have shrunk in recent years. We also do not foresee any further rapid ascent to 3.5% before the Fed makes its next interest-rate move.
Maintain OVERWEIGHT
DBS remains our top pick. We believe it is best positioned to take advantage of rising interest rates. Our second choice is UOB.
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