- Expectations of fewer rate cuts continue to grow
- US banks’ 1Q24 results surpassed expectations; risks to the economy persist
- Impact from fewer rate cuts mixed across US, Hong Kong, and Singapore banks
- China banks continue to see revenue growth pressure in FY24F; lower credit costs likely the main earnings driver
- Asian banks continue to be attractive dividend yield plays, offering 6-10% dividend yields for selected stocks
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Expectations of fewer rate cuts continue to grow. The US economy has not seen inflation come back to the central bank’s 2% target. With US consumer price index (CPI) surprising to the upside for the third straight month alongside a strong labour market, risks are now tilted towards fewer cuts for this cycle. We now see the Fed cutting by 50 bps (two cuts vs an expected four cuts previously) in 2H24F, followed by another 100 bps of cuts in 2025, taking the Fed Funds rate from 5.5% to 4.0% by end-2025. While higher interest rates are typically good for banks’ net interest margins (NIMs), we believe there continues to be uncertainty for global banks despite fewer rate cuts in the works.
US banks kicked off results season. JPMorgan (JPM), Citigroup (Citi), Wells Fargo (WFC), and Bank of America (BOA)’s 1Q24 results all surpassed street expectations, even as their management continued to highlight risks to the economy, including geopolitical risks and high inflation, among others. Apart from BOA, the other banks all saw net interest income (NII) decline q/q, even amid higher interest rates, as higher deposit costs continue to weigh on margins with depositors looking towards higher-yielding alternatives. US banks continued to expect higher credit card net charge-offs through 2024 as delinquency rate continued to rise.
Impact from fewer rate cuts likely mixed across US, Hong Kong, and Singapore banks. For US banks, as higher deposit costs continued to weigh on NII, we expect most banks to continue seeing q/q decline in NII during 2Q24 and broadly expect FY24F NII to decline y/y. Singapore banks have started to cut interest rates across its deposits as well as let go of more expensive fixed deposits, in a bid to manage NIMs, which should be positive. For Hong Kong banks, as 1Q24 HIBOR was lower than its peak in 4Q23, the competition for deposits was less intense, although the time-deposit migration trend remains. We expect Hong Kong banks to see more NIM downward pressure in 2H24.
On the other hand, for China banks, we expect the revenue pressure to carry on into FY24F, with the lower interest rate environment and lower fee rate for agency business. We expect NIM to experience continuous downward pressure, amounting to double-digit bps of y/y drop. China banks’ earnings growth will likely be from lower credit cost for FY24F.
Asian banks continue to be attractive dividend yield plays alongside undemanding valuations. China, Hong Kong, and Singapore banks continue to be attractive dividend yield plays with forward dividend yields ranging 6-10%. There is potential for further dividend upside for Singapore banks, which have excess capital. Valuations are currently undemanding for China, Hong Kong, and Singapore banks, especially for China banks, which are trading at c.0.3x forward P/B. We believe that risk-reward is favourable given the cheap valuations which have priced in downside risks in economic growth and asset quality. Among the US banks, we prefer names with high-quality franchise which continues to deliver superior ROE.
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Related insights
- Research Library18 May 2024
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Related insights
- Research Library18 May 2024
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- China: Mixed data underscore need for more easing17 May 2024