Banks

Banks: The Singapore Savings Bonds (SSB) will be launched in 2H15, targeting at retail investors.

With a minimum investment amount of $500, interest rate for the new product will be linked to prevailing long-term rates of Singapore Government Securities (SGS). But unlike fixed rates of SGS, coupons for SSB will start with lower interest rates and have an annual step-up (capped at the tenth year) into the term.

Investors may also find flexibility in the new product, given the investors can redeem and cash out the bond at any time without penalty. The bonds cannot be traded on the open market.

The new government bond is likely to put upward pressure on funding costs as it competes directly with banks' fixed deposits. But that depends on the size and individual cap of the bond offering.

Notwithstanding, the street generally remains bullish on the banking sector, with the expectation that the gradual tightening in interest rates should translate to an expansion in net interest margin.

Maybank-KE prefers DBS for its low SGD loan-to-deposit ratio (DBS: 79%, OCBC 84%, UOB 97%), allowing the bank ample headroom to lend at higher rates going forward.

OCBC is the riskiest as its loan profile is geared towards later stages of the credit cycle, exposing it to asset quality deterioration in a rising interest rate environment.

UOB fits the bill in a defensive strategy, given its strong capital management (highest CET-1 ratios), limited exposure to commodities and conservative provisioning amongst the three banks, but it is also the least likely to benefit from a NIM recovery.