Singapore's three local banks are likely to experience margin squeeze in the third quarter as the Singapore Inter-bank Offered Rate heads south, following in the footsteps of Federal Reserve's rate movement.  Analysts are also watching non-performing loan ratios amidst a weaker global economic environment.

Even as loan growth is expected to remain steady, Singapore's local banks - DBS, UOB, OCBC - could be seeing lower margins ahead caused by lower Singapore Inter-bank Offered Rate (Sibor), analysts say. The Singapore trio is due to report their Q3 results in November.

Net interest margins (NIMs) for the banks are likely to see limited growth, if any, with the bulk of domestic mortgage repricing behind them, Maybank Kim Eng analyst Thilan Wickrama-singhe said in a report.

Sensitivity To Sibor's Drop

DBS's earnings are known to be the most sensitive to changes in the Sibor compared with its peers, said Wickramasinghe. He points out that the 12 basis point (bps) drop in Sibor since August following the interest rate cuts by the Fed may affect DBS's NIMs more adversely, on the back of its larger, slow-to-reprice current and savings account funding base.

UOB will kick off the results season for the three banks, announcing its results on November 1, followed by OCBC on November 5. DBS will cap off the earnings season for banks on November 11.

Loan Exposure To Greater China

RHB analyst Leng Seng Choon is cautious about OCBC and DBS's loan exposure to Greater China, as there is a risk of higher Non-Performing-Loans (NPLs), given the U.S. -China trade war that is affecting China's economic growth. According to brokerage, 29.9 percent of DBS's loans are to Greater China, compared to OCBC's 24.2 percent and UOB's 15.7 percent.

In a similar tone, DBS analyst Lim Rui Wen flagged that UOB is preferred for its smallest exposure to Greater China among the local banks, as well as the lowest sensitivity to falling interest rates in terms of NIMs.

Bright Spots

Even as net interest margins are expected to be softer, non-interest income is likely to see support from wealth management, analysts observe.

New private banking inflows from North Asia should drive stronger non-interest income for DBS and OCBC, which in turn is likely to support positive earnings momentum, said the Maybank Kim Eng analyst.