• Top Pick: DBS. The US Federal Reserve (US Fed) kicked off the rates downcycle with a 50bps cut to the Federal Funds Rate (FFR) on 18 Sep. This was largely priced in by markets, but was larger than our house view (a 25bps reduction). The share prices of the banks under our coverage (SG Banks) have held up well since, which suggests the cuts may have been already priced in. Amid a scenario of flattish earnings – as the interest rate cycle turns – we think the focus should be on dividend yields and DPS growth. Our preferred pick is DBS for capital management. Still sector NEUTRAL.

• 100bps rate cut now expected. Post the sharper-than-expected reduction, RHB Global Economics & Market Strategy (RHB GEMS) has revised its view on the FFR and now expects further reductions of 25bps each in the November and December Federal Open Market Committee (FOMC) meetings. This is vs the earlier view of a total FFR reduction of 50bps for this year. The change is based on the shift in the US Fed’s language and economic projections during the September FOMC meeting. More importantly, RHB GEMS highlights that the change does not represent an alteration in global growth assumptions nor made in anticipation of a recessionary backdrop. Closer to home, RHB GEMS thinks the Monetary Authority of Singapore will likely keep policy parameters unchanged for 2024.

• SG Banks have taken steps to mitigate impact from rate cuts... In anticipation of the rate cut cycle, recall that SG Banks have been taking steps to protect NII by hedging, as well as adding duration and fixed rate assets to their portfolios. Consequently, NII sensitivity is now lower vs the start of the rate hike cycle. Based on the recent briefings, SG Banks guided for NII sensitivity of c. SGD4-5m/bps change or c.3% (DBS) to 7% (United Overseas Bank) impact to PBT for a 100bps change in rates (full-year basis). This is as compared to the previous sensitivity, which DBS said was around SGD18- 20m/bps back in 2021.

• …while bottomlines could be further shielded by other mitigating factors. In our view, the distinction between a rates normalisation and recessionarydriven rate cut cycle is important. Given RHB GEMS’ view that global growth is intact, we think the impact from a rates normalisation cycle on NIMs could be further cushioned by potentially improved loan volumes and wealth management opportunities. Also, lower rates could help ease asset quality pressures (eg commercial real estate segment), leading to lower credit costs.

• No change to earnings for now. We have left our earnings forecasts unchanged at this juncture. We expect sector 2024F PATMI to rise by a decent 6% YoY, underpinned by mid-single-digit operating income growth and stable credit costs. However, we expect 2025F PATMI to stay flat, mainly as NIM compresses and there is a moderation in non-II growth. Upside risks to earnings include better-than-expected loan growth and non-II (robust wealth activities and treasury flows), as well as lower-than-expected credit costs. Downside risks could come from NIMs pressure and weaker-thanexpected other non-II, especially on the treasury and market fronts.

Source: RHB Securities Research - 23 Sept 2024