Since the start of the year, the swap offer rate (SOR) has been on a downtrend. This is in stark contrast with market expectations of a pass-through from higher US short-term rates to SG rates. As a result, the risks of negative earnings revisions in SG banks are building up. This in turn increases the risks of earnings disappointment and share price correction for SG banks.
US investment bank J.P. Morgan said in its 22 June report that the 3-month SOR touched 68bps, down 33bps year-to-date. Given that the SG banks have generally performed well in this year, this poses risks in the near-term.
Therefore, J.P. Morgan now prefers SGX among SG financials, as the stock provides consistent returns and respectable 4% dividend yield. Furthermore, the cash trading volume appears to be finally recovering, following a downtrend in the last ten years. In addition, an increase in IPOs poses further upside potential for the exchange.
For investors looking at exposure to banks, J.P. Morgan likes DBS the most, as its new revenue streams built over the last four years are now gaining from positive operating leverage. Also, DBS has good cost controls, having made a number of digital investments over the past 2-3 years.