Singaporean bank stocks are priced near the cheapest valuations in 16 months as the city’s borrowing costs and loan volumes drop, presenting an opportunity to investors betting on a U.S. interest-rate increase this year.
The decline in Singapore’s interbank rate from a six-year high is temporary and it will probably rise in step with Federal Reserve rates in coming months, according to Samsung Asset Management’s Alan Richardson. That’s likely to boost interest income and margins at DBS Group Holdings Ltd., Oversea-Chinese Banking Corp. and United Overseas Bank Ltd., he said.
Shares of the banks, Southeast Asia’s largest, slumped an average 4.6 percent last month as the interbank rate retreated and data showed outstanding loans in the city dropped for a third month in April to a one-year low. The lenders’ mean price-book ratio slid to 1.25 times on June 2, the lowest since February 2014, data compiled by Bloomberg show.
“I’d use it as a buying opportunity,” said Richardson, who’s based in Hong Kong and invests in the banks for Samsung Asset, which oversees $112.5 billion. “Singapore banks are more in sync with the global interest-rate trend, which is to go up.”
DBS shares dropped 0.5 percent to S$20.10 as of 11:18 a.m. local time on Monday. OCBC fell 0.4 percent, while UOB added 0.6 percent.
Since June 2, the banks’ shares have risen an average 0.8 percent, taking their mean price-book ratio to 1.26 times. DBS lost 2.4 percent this year, compared with the Bloomberg Asia Pacific Banks Index’s 8 percent gain. OCBC dropped 4.6 percent, while UOB sank 6.4 percent.
Last week’s slump in the banks’ shares was “overdone,” said Kevin Kwek, an analyst at Sanford C. Bernstein in Singapore. “U.S. rates will eventually rise,” which will boost the city’s interest rates, he said.
The two countries’ monetary actions are closely linked as Singapore manages its policies using an undisclosed basket of currencies belonging to its major trading partners. Investors expect the Federal Reserve to raise its benchmark rate for the first time since 2006 in December, according to bets placed in interest-rate futures markets.
This year’s climb in the three-month Singapore interbank offered rate, or Sibor, helped boost first-quarter interest margins for the city’s banks. After peaking at 1.02 percent two months ago, the rate has dropped to 0.83 percent as of Friday. That’s still more than double its level from a year earlier.
Loans at the city’s banks have contracted this year as the climb in Sibor deterred borrowers, while demand for trade finance had weakened amid an economic slowdown in Southeast Asia and China, Wai Ho Leong, a Barclays Plc economist, said Friday. Outstanding advances fell to a one-year low of S$594.3 billion ($437 billion) in April, Monetary Authority of Singapore data show.
The city’s banks have placed 2.3 percent of their lending books in a “special mention” category, the first signal that a company may struggle to repay, the highest since 2009, MAS data show.