SINGAPORE (Nikkei Markets) -- Singapore's three banking groups are tipped to outperform the broader stock market yet again this year, as an improving economy lowers risks for the sector while higher interest rates help earnings.
A strong rally in 2017 has already boosted the banks' share prices between 30% and 44%.
The Straits Times Index, which tracks the performance of 30 blue chips, gained 18% last year, led by China yard operator Yangzijiang Shipbuilding Holdings and property giants Global Logistic Properties and City Developments. The banks, which have a combined weightage of about 40% of the index, were the other top performers.
The Singapore Exchange said on Monday that banks attracted the bulk of institutional investments in 2017. DBS Group Holdings, which includes DBS Bank, drew 1.77 billion Singapore dollars ($1.33 billion) in inflows, followed by Oversea-Chinese Banking Corp with S$1.2 billion and United Overseas Bank with S$426 million.
Singapore banks tend to benefit from rising interest rates because they can charge borrowers more even as they keep a lid on the interest they pay on savings deposits.
The city-state's benchmark three-month Singapore interbank offered rate, or Sibor, rose above 1.5% last Wednesday, hitting the highest level since October 2008, according to Thomson Reuters data. The rate reached 1.25% at the end of December and traded below 1% between April and July last year.
The three-month Sibor is a widely used reference rate for various types of loans, including floating and fixed-rate housing loans.
DBS Bank said in a report it expects Sibor to rise to 2.15% by the end of 2018, giving a further lift to bank earnings.
Credit Suisse, which has an overweight rating on Singapore banks, said the consensus of analysts is for earnings growth of 14.7% for the group this year. The Swiss bank added in a report that earnings could surprise on the upside as loans grow by high single digits and interest margins widen.
DBS has buy recommendations on rivals OCBC and UOB for similar reasons.
DBS, which does not rate its own shares, said OCBC and UOB could additionally benefit from lower provisions for bad loans as conditions in the oil and gas industry improve.
Malaysian securities firm RHB is more cautious in its outlook on the Singapore lenders with a slight bias to overweight, acknowledging the potential for positive surprises. Banks tend to perform well during interest rate upcycles, said Leng Seng Choon, an analyst at RHB in Singapore.
In a report on the Singapore stock market released last week, Credit Suisse forecast a 10% rise in the STI this year based on a target of 3,800. The benchmark index is currently trading around 3,500, which is well below the all-time high of 3,875.77 reached in October 2007.
The Swiss bank said it expects the composition of Singapore growth to become more balanced, with construction and investment proving less of a drag on growth even as manufacturing slows from its red-hot pace. Restructuring could also boost returns at large companies in the city-state, it said.
In the case of Singapore banks, Credit Suisse said DBS and UOB could increase their dividend as both lenders "are comfortably ahead of the regulatory capital requirements and internal capital targets."
DBS estimates that OCBC's net interest margin could rise by two basis points and that of UOB by one basis point for every 25-basis-point increase in the three-month Sibor. There may also be spin-off benefits as OCBC could take advantage of the steeper yield curve, which is the difference between short and long-term rates, to improve returns.
As for UOB, it would gain the most from the recovery in Singapore's property market, since its loan book is more dependent on the real estate and construction sectors compared to rivals, DBS said.