What to expect from Singapore banks' NIMs when long-term rates increase

Which bank could benefit the most?

According to Nomura, the uptick in bond yields presents gapping opportunities to the Singapore banks by lengthening the duration on their bond portfolio to extract better yields.

Here's more from Nomura:

We analyse two periods when the five-year government securities yields rose about 80-90bp (2Q03-4Q04 and 2Q05-2Q06) and the resulting impact on the banks’ investment securities returns.

Back in 2003 when five-year bond yields rose by 80bp from mid-2003 until 4Q04, DBS’s average return on its investment securities increased about 50bp, boosting overall NIMs by 15bp. (During this period, the SIBOR also rose about 90bp, leading to a 80bp jump in interbank yields.)

By comparison, OCBC’s securities portfolio yield rose a more modest 16bp. (UOB did not disclose a breakdown of its interest income prior to 2004.)

During the 2005-06 upcycle, when five-year yields rose about 90bp, DBS was again the outperformer, as its average return on securities rose 95bp, outpacing UOB’s 87bp and OCBC’s 56bp. 

Recall in 2012, the banks shortened the duration of their investment securities portfolio as they locked-in gains when interest rates were near historically low levels. All three banks had similar investment securities return of 2.6-2.7% as of end-4Q11.

By 1Q13, the most aggressive in reducing its portfolio duration appears to be UOB, where its investment securities returns fell 80bp to 1.9% in 1Q13 from 2.7% in 4Q11 followed by DBS (-58bp). OCBC had the least change in its portfolio return (-15bp).

Assuming all three banks can raise their >three-year bond returns by 50bp, we estimate DBS could benefit the most – an estimated enhance of 2.5% in net earnings – while OCBC at +1.7% and UOB at +1.6% are fairly similar.