- Rate cuts, weighing on banks’ net interest income, should be priced in for now
- Emerging markets such as Indonesia set to benefit from increased liquidity flow
- Asian banks continue to be attractive dividend yield plays
Rate cuts priced in; emerging markets such as Indonesia poised to benefit from increased liquidity flow. Our economists expect the Federal Reserve to lower rates by 25 bps per quarter starting from 3Q24, continuing for six consecutive quarters. For now, the impact of rate cuts should already be priced in, though faster-than-expected cuts could accelerate fund outflows from bank stocks. Through the remainder of this year and next, banks should continue to see supportive non-interest income growth which would help to offset weakness in net interest income (NII) as rates begin to decline.
Globally, banks have been preparing for an environment of lower rates by increasing hedging positions while sustaining growth in wealth management and global transaction fees. In our view, impending rate cuts should be more beneficiary for banks from regional emerging markets, compared to those from developed markets. Among ASEAN, Indonesia banks are primed to benefit from increased flows to emerging markets.
In the earlier half of the year, Indonesia banks faced net interest margin (NIM) pressure due to tighter liquidity as loan growth exceeded third-party funds growth. Our economists expect Bank Indonesia (BI) to follow the Fed in adjusting its policy rate – in the near-term, Indonesia banks will broadly benefit from rate cuts as their liabilities are more sensitive to rate adjustments. Additionally, rate cuts should bode well for the IDR against the USD; a stronger domestic currency would improve investor sentiment, posing tailwinds for the banking sector.
Attractive dividend yield play. With selected banks offering forward dividend yields ranging from 5-10%, we continue to favour several banks across China, Hong Kong, and Singapore which return dividend yields that will compare favourably in an environment of lower rates. For Singapore banks holding excess capital, we see potential for further dividend upside. Valuations continue to be undemanding for Hong Kong, Singapore, as well as China banks in particular, which are trading at c.0.4x forward P/B ratios. In conclusion, the risk-reward for Asian banks remains favourable as we believe downside risks from declining economic growth and asset quality have already been priced in.
Figure 1: Asia’s interest rate environment
Source: Bloomberg, DBS
Data as of 10 Sep 2024
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