Source: Refinitiv, IG
For banks’ key component of interest income, this had perhaps had a mixed impact. On one hand, against the backdrop of the uncertain trade climate, economic performance deterioration for the Asia region had weighed on business and market confidence leading to subdued loan growth. Average loan growth in Q4 was seen remaining in low single-digit growth at 2.9%. On the other hand, this weakness had invited central bankers to act early in support of the economy with the Federal Reserve cutting rates for the third and last time for 2019 in October. Alongside the Fed, various Asia central banks had also correspondingly eased monetary policy seeing to stabilisation of economic conditions into the yearend. This however serves as a double-edged sword with net interest margin – which is the difference between the interest income and the amount paid out to lenders – being squeezed as well. Singapore’s 3-month SIBOR had declined from around 1.88% in September to around 1.77% in December with Fed funds rate.
That said, the above may not come as a surprise with guidance from banks’ management having pre-empted this expectation of lowered net interest margins. DBS, which is the first to report, had placed this expected decline at around 7 basis points for the whole of 2020 in their Q3 2019 results presentation, having also alluded to the expectation of low-single digit growth, which may be the new normal from here. The good news may also be the limited likelihood of the Fed further lowering interest rates in the 2020 election year.
Broadly on non-interest income, fees are expected to come in with the seasonal Q4 weakness while little expectations are present for significant asset deterioration despite the risk off mood that had plagued markets for a good portion of the quarter.
Guidance from management will be key
Moving forward, guidance may once again be key here as the market grapple with the uncertain impact from the 2019-nCov situation or better known as the coronavirus. As the headlines have suggested, the coronavirus had thus far claimed more lives than the 2003 SARS virus as of early-February, saw to cities undergoing lockdown and disrupted air travel from the biggest tourism market to many parts of the world including Singapore.
The current duration in which the coronavirus had affected the Chinese economy and the region may be regarded as slight at present, but it will no longer be immaterial if the magnitude and duration of the impact continue to increase exponentially. The fortunate development had been the quick response from authorities, but for bank earnings that are intertwined with the macroeconomic environment, the outlook will be key.
The local Straits Times Index had taken a beating in the immediate week after concerns erupted, falling 2.7% in the week after the Chinese New Year holidays. The issue may remain a key factor guiding the broad market sentiment alongside earnings performance in week, but any provision of a softer guidance could bring about further pressure for prices.