Don't get your hopes up unless Singapore banks' NIMs expand by 30bps or more

An increase of 10bps has no significant effect on net profit.

According to Maybank Kim Eng, it is commonly believed that rising rates will widen NIMs for Singapore banks. Anecdotally, their 2Q15 results already reflected a slight uptick in NIMs, which added to the optimism. The market’s rationale is two-fold. 

Firstly, as Singapore banks are net interbank lenders, a higher rate should generate incremental income on their excess funds. This benefits their bottom lines. Secondly, most of their loans are priced on a cost-plus basis, including mortgages, while deposit rates are fixed. The repricing interval helps margins.

So an improvement in NIMs appears to have started. But to what extent can they improve?

Here's more from Maybank Kim Eng:

In our recent report, Singapore: The Growth Conundrum dated 10 Sep 2015 where we stress-tested Singapore companies and banks, the tests suggested that every 10 bp change in NIM could impact banks’ net profits by 6-7% for 2016. At 10 bps increase in margins, the marginal improvement to net profit is not huge. Therefore, it makes sense to be upbeat on the sector only when NIMs expand by 30 bps or more.

Given that margins have moved from a recent high of ~2.66-2.98% during the Global Financial Crisis to ~1.68-1.71% in 2014 in the wake of a plunge in global rates, a recovery of ~30 bps might not seem unrealistic. 

Banking analysts are scrambling to model in NIM expansion for the three banks. They are generally factoring in a 3-9bp expansion for 2015-16, raising their net-profit forecasts by 7.1% for 2015 and 7.9% for 2016.