Singapore banks' loan growth predicted to slow down to 7% in 2015

As rate spikes take bite.

With regard to Singapore banks, it has been noted that rising rates should be taken as a boon, not a bane.

According to a research note from Maybank Kim Eng, 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, Maybank Kim Eng estimates 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, Maybank Kim Eng expects 3ppt cuts to 4-5%, at most.

Moreover, Maybank Kim Eng 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%.

Here's more from Maybank Kim Eng:

Rising rates a boon or bane? Some clients are apprehensive about the impact of the recent spike in Singapore’s short-term rates on banks’ profitability. Slowing loan growth and weaker credit quality, they fear, could overshadow fatter NIMs.

Yes, rate hikes could weigh on loan demand. Already, banks are complaining about softer loan growth. We expect growth to slow down to 7% this year from 9.5% last year, owing to:

- Weaker business-loan demand in a lethargic economy.
- A soft housing market.

But in our sensitivity analysis, incremental net interest income from the recent 50bp increase in the 3-month SGD SIBOR and SOR should equate to 3-4x any revenue lost from a 1ppt shortfall in loan growth. The boost to net interest income is significant as NIMs are rising from a low base.

In other words, FY15 loan growth would need to fall short by 3-4ppts from our projection in order to wipe out fatter NIMs. And by next year, we are looking at a potential rebound to 8% loan growth.