Recent economic data for Singapore have pointed to a sharp slowdown in exports. As a result, the Government has slashed Singapore’s full-year growth to between 0-1%, down from a previous forecast of 1.5% to 2.5%.
At the recent National Day Rally, Prime Minister Lee Hsien Loong acknowledged that the Singapore economy is taking a hit and that the Government stands ready to implement supportive measures should things get much worse.
For Singapore banks though, such as DBS Group Holdings Ltd (SGX: D05), Oversea-Chinese Banking Corporation Limited (SGX: O39), or OCBC, and United Overseas Bank Limited (SGX: U11), or UOB, investors may wonder if their growth may start to stall and splutter. Are the banks sailing into a perfect storm that will batter their share prices?
A slowdown in economic growth
Many businesses are bracing themselves for an economic slowdown, with the news reporting that various sectors such as retail, electronics, and services already seeing signs of lower orders and demand.
This slowdown has also been described as being different from the previous Global Financial Crisis (GFC) as it involves higher costs throughout the whole supply chain as the US and China continue their trade war.
As businesses feel the pain of lower demand and plummeting orders, many will also cut back on expansion plans and batten down the hatches to prepare for the storm. This will impact banks’ loan growth and stymie their ability to grow their loan book.
Interest rates moderating
With global growth sputtering, the US Federal Reserve has initiated its first interest rate cut since the GFC, reducing rates by 25 basis points (i.e. 0.25%). While Singapore has yet to feel any impact from this rate cut, economists have pointed out that more cuts may loom over the horizon if the numbers from the US continue to look bad.
Banks thrive when rates rise, as this allows them to re-price their loans at higher rates. If rates start heading south, local banks may not be able to expand their net interest margins further.
Digital bank disruption
In addition to the above headwinds, the Monetary Authority of Singapore (MAS) has also announced that they are planning to allow up to five digital banks soon, two with full licenses and three with restricted licenses.
The opening of the floodgates to non-bank companies to compete with the incumbents may take a toll on the local banks’ deposit growth rates, and also raise the cost of their deposits (i.e. the interest rate they pay out on their savings and current accounts).
Valuations remain high
From the above, it does seem that the banks are headed into a perfect storm that will depress loan growth, crimp their net interest margins and introduce more competition into the sector.
DBS is still trading at 1.4x book value, UOB at 1.2x book value while OCBC is trading just slightly above book value (at 1.1x). Investors may wish to wait for less demanding valuations before committing their capital, in light of the uncertainties and challenges ahead.
The information provided is for general information purposes only and is not intended to be personalized investment or financial advice. The Motley Fool Singapore has recommended shares of DBS Group Holdings Ltd, Oversea-Chinese Banking Corporation Limited and United Overseas Bank Limited. Motley Fool Singapore contributor Royston Yang does not own shares in any of the companies mentioned.