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1 Chart That Would Make Singapore’s Banks Happy

Singapore’s stock market has three listed domestic banks, namely, DBS Group Holdings Ltd (SGX: D05), Oversea-Chinese Banking Corp Limited (SGX: O39), and United Overseas Bank Ltd (SGX: U11).

My colleague David Kuo recently wrote that the trio “make the bulk of their money from the difference in the interest rates that they charge borrowers and the deposit rate that they pay to savers.” (The difference in the two rates is known in finance-speak as the net interest margin.)

This characteristic is what would make Singapore’s banks happy to see the following chart:

federal-reserve-dot-plot
Source: Federal Reserve

The chart is a dot plot from the Federal Reserve, the US’s central bank. Here’s my US-based colleague John Maxfield explaining what the chart means in a recent article of his:

“The dot plot is updated each time the Federal Reserve votes on whether to raise or lower interest rates. It plots where each member of the Federal Open Market Committee believes short-term interest rates, the fed funds rate specifically, will be over the next three years.”

John goes on to illustrate the significance of the dot plot:

“The… important point to take away from the Fed’s dot plot is the fact that the people in charge of monetary policy expect interest rates to rise in the future.

Take 2017 as an example. See how a plurality of FOMC members think the fed funds rate should end the year between 1.25% and 1.5%? Given where we are today, that’d equate to three more rate hikes of 25 basis points each.

The story is similar if you look at 2018, which is expected to see even higher rates. A plurality of Fed governors think the appropriate range for the fed funds rate will be between 1.75% and 2% two years from now, with a majority forecasting even higher rates.

This carries through to 2019, when rates are expected to move closer to most members’ expectation for the long-term trend in rates, a fed funds rate around 3%.”

Some of you might be wondering what has this got to do with Singapore’s banks? Thing is, interest rates in Singapore are not controlled by our central bank, the Monetary Authority of Singapore. Instead, they are heavily influenced by what happens in the US.

If interest rates in the US climb in the future, this could drag rates in Singapore higher too. And, this could be a boon for Singapore’s banks. That’s because the net interest margin for the banks here could rise along with interest rates.

Of course, nothing’s set in stone when it comes to interest rates. There’s no guarantee they will rise in the next few years. As John commented in his aforementioned article:

“It remains to be seen, of course, whether the Fed will actually follow through on these forecasts. After all, a lot can happen between now and 2019 that would throw these forecasts off.”

But if the path of interest rates in the US over the next few years does follow the general direction of the dot plot above, that would likely make Singapore’s banks happy.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. The Motley Fool Singapore has recommended shares of United Overseas Bank. Motley Fool Singapore writer Chong Ser Jing doesn't own shares in any companies mentioned.