Since the post U.S. presidential election on 09 November 2016, the big three Singapore banks (DBS, UOB & OCBC) have been outperforming the regional MSCI Asia ex Japan and Singapore Straits Times Indices (refer to chart 1).
Chart 1 – Performance of Singapore Banks
(Click to enlarge chart)
Two fundamental factors can be attributed to the recent remarkable rally seen in Singapore banks; higher expected U.S. interest rates that can increase net interest margins as Singapore’s interest rate (SIBOR) tracks U.S. interest rate in a lock-step fashion and financial deregulations from the restrictions imposed on U.S. financial institutions by the Dodd-Frank Act proposed by U.S. President Trump’s administration.
Therefore, this coming Wednesday (15 March 2017), U.S. Federal Reserve FOMC meeting will have a potential impact on the share prices of Singapore banks in the short to medium-term. It is not the outcome of FOMC meeting that matters now as expectations based on the Fed fund futures pricing (as of 13 March 2017) from the CME FedWatch tool has indicated a probability of 94% that the Fed will hike another 25bps on 15 March 2017 to 75-100bps, a near certainty done deal. Right now, a potential factor that can move the markets especially financial stocks after Wed’s FOMC is as follow;
- Changes in tonality of the monetary policy statement – From its previous two statements from the December 2016 and February 2017 meetings, the Fed had choose to maintain a neutral stance on survey-based measures of longer-term inflation expectations. It stated that such expectations were almost unchanged on balance. In a recent survey conducted by the Federal Reserve Bank of New York in February 2017 found that U.S. inflation expectations in a year ahead had rose for the second consecutive month in January to 3% from 2.8% in December 2016 and 2.5% in November 2016, a highest level not seen since mid-2015. Even the longer term inflation expectation (three years ahead) was up 2.9% from 2.8% in December 2016. Therefore, there is chance that the Fed may sound more upbeat on future long-term inflation expectations that can solidify the pace of the remaining two projected interest rate hikes for 2017.
If such change of tonality materialises, it may drive up the share prices of Singapore banks on a short to medium-term horizon (see below for a medium-term technical outlook on United Overseas Bank) due to an increase in net interest margins as market will start to price in a higher chance of future U.S. policy interest rate increases that can drive up Singapore interbank interest rates.
However over a longer-term horizon, the recent double digit percentage gains recorded by Singapore banks since post U.S. presidential election may not last long as market will start to price the following potential negative elements;
- Based on the latest Q4 earnings reports, Singapore banks (UOB, DBS, OCBC) y/y loan growth remained lacklustre between 4.5% to 8.8% at the end of 2016, the lowest level since 31 December 2012 where the banks recorded a y/y growth between 6.6% to 8.3%. If the external economy deteriorates due to a trade war between U.S. and China and rising protectionism in Europe, loan growth will likely to decline further which can add downside pressure on Singapore banks’ profit margins.
- Non- performing loans – NPL ratios of the Singapore banks have started to dip slightly to an average of 1.4% as at 31 December 2016 after a steady increase from 31 December 2014 average of 0.9%. The increase in NPL ratios can be attributed to the woes of the oil and gas sector trigged by a plunging oil prices from June 2014 to February 2016. Singapore banks have a significant exposure to the oil and gas sector in terms of loans. In the last week, WTI crude oil futures had started to fall steeply due to increasing supplies from U.S. shale producers and broke below the key long-term support zone of 50.00/49.60 per barrel. If there is another price war that breaks out between OPEC and U.S. shale producers after the Saudis engineered production cut agreement between OPEC and non-OPEC nations ends in June 2017, oil prices is likely to tumble further and next major support for the WTI crude oil rests at the 37.20/36.50 zone. A further weakening of oil price is going to bring back the “dark days” of 2015/16 for Singapore oil and gas related firms which can translate to an increase in NPL ratios as well as provisions for NPL of the three Singapore banks.
Now, let’s us take a look at one of the Singapore banks, UOB from a technical analysis perspective
Technical Outlook on United Overseas Bank (UOB) (SGX: U11)
(Click to enlarge chart)
Key technical elements
- Since its low of 17.51 on 17 August 2016, UOB has been evolving in a bullish ascending channel with its upper boundary at 22.60/90 (see daily chart).
- The aforementioned ascending channel resistance (upper boundary) of 22.60/90 also confluences with a former swing low area of 02 June/09 July 2015 and a Fibonacci cluster (see daily chart).
- Based on the Elliot Wave Principal and fractal analysis, UOB is likely shaping a minor degree bullish impulsive wave 5 up move in place since 23 December 2016 low of 20.05 with a potential end target at 21.66/22.00 max 22.40 to complete a possible intermediate degree (higher time frame) wave c/ that is in place since the medium-term significant swing low of 16.80 printed on 25 February 2016. This potential higher degree wave configurations suggest that a potential primary degree wave (b) top may occur at 22.40 after the completion of the possible intermediate degree wave c/. Interestingly, the expected upside target of 22.40 is just below the aforementioned key long-term resistance at 22.60/90 derived from a graphical approach. Thus, UOB may start to see a potential multi-month decline of 11% towards the 20.05/19.80 support after the 22.40 resistance is being met (see 4 hour & daily charts)
- The shorter-term (4 hour) RSI oscillator remains bullish above its support at around the 44% level and still has room to manoeuvre to the upside before it reaches an extreme overbought level at 78%. These observations suggest that upside momentum of price action remains intact in the medium-term (1 to 3 weeks)
- The significant medium-term support rests at 21.08 which is defined by the former congestion area from 16 January to 13 February 2017 and the close to the 23.6% Fibonacci retracement of the rally from 17 August 2016 low to 24 February 2017 high of 21.95
Key levels (1 to 3 weeks)
Intermediate support: 21.43
Pivot (key support): 21.08
Resistances: 22.00, 22.40, 22.60/90.
Next supports: 20.39 & 20.05/19.80
Conclusion
As long as the 21.08 pivotal support holds, UOB may see a potential last push up towards 22.00 before targeting the next resistance at 22.40 in the medium-term term (1 to 3 weeks).
However, failure to hold above 21.08 is likely to invalidate the preferred bullish scenario to trigger the start of a potential multi-week decline towards the next support at 20.89.
Charts are from eSignal
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