UOB’s net interest margin may face pressure ahead as more-expensive fixed deposits make up a greater portion of the bank’s funding mix, Phillip Capital said in report on Thursday.
The net interest margin (NIM) is the difference between the interest rate banks charge to lend and their cost of funds.
Phillip Capital pointed to UOB’s fourth quarter, which showed current account and savings account, deposits grew just 5.2 percent on-year, the slowest rate in more than three years, while its fixed deposits grew 7.8 percent on-year in the quarter, faster than 2018’s average 3.7 percent.
“As interest rates rise, the amount of demand deposits decreases as investors redirect their funds into higher yielding investments such as fixed deposit,” the report said. “With a higher proportion of fixed deposits in the deposits mix, the cost of funds rises, making it challenging to achieve NIM expansion.”
It forecast full-year NIM of 1.82 percent, down from its previous forecast of 1.84 percent.
The push to raise fixed deposit funds coupled with the bank’s wariness on raising mortgage interest rates too soon resulted in a relatively flat NIM in 2018, Phillip Capital said.
UOB had been concerned about raising mortgage rates as mortgage volume fell after the government introduced fresh property cooling measures in July 2018, the note said.
Phillip added that there was still room for benchmark SIBOR and SOR rates, which are the basis for many mortgage rates, to rise over the next three months on a lagged pass-through from the U.S. Federal Reserve’s interest rate hikes.
NIM growth is expected for the first and second quarter, mainly from the retail mortgage book repricing, with around half the mortgage book potentially repriced, the note said.
“However, with the recent pause in a rate hike and dovish stance from the Fed, now is the best and probably last time for Singapore banks to hike their board rates and reprice their loans before interest rates start to tail down,” Phillip said.
The brokerage kept a Buy call on UOB shares, but cut its target price to S$32.00 form S$32.50.
UOB shares were up 0.41 percent at S$26.91 at 11:19 A.M. SGT.