With 2017 coming to an end, it is time that we start reflecting on what went on in the market and look towards the next year. For Singapore banks, 2017 proved to be a fantastic year as the three banks rose over 30 percent. This is despite the turbulence caused by defaults arising from the oil and gas sector. On this note, there are two key points that investors need to know about Singapore’s banking sector in 2018.

Net Interest Margin

Despite the three interest rate hikes this year by the US Federal Reserve, Singapore banks failed to benefit from them. This is because the rise in interest rate has not led to an increase in net interest margin (NIM). Going forward, analysts from DBS Research expects three interest rate hikes next year by the Federal Reserve, which will increase their forecast for NIM by five basis points in the assumption that the hike will be passed over to SIBOR or Swap Offer Rates (SOR).

Cleaner Asset Quality in 2018

After the huge write-offs seen in 3Q17, the non-performing loans (NPLs) should have been adequately dealt with. 2018 will be a fresh start for banks and cost for credits will ease. Credit cost is expected to fall by six basis points in the next year. However, the wild card in next year will be on the implementation of IFRS9. IFRS9 refers to the new accounting treatment of excess general provision reserve that will kick in next year.

Oversea-Chinese Banking Corporation

Oversea-Chinese Banking Corporation (OCBC) has a key differentiator from its peers which is strong growth in non-interest segment. Its non-interest segment, mainly insurance and wealth management performed relatively well and provided a slight buffer when the industry was experiencing strong write-offs from the oil and gas sector.

Loan growth for the year is strong with its year-to-date growth at 5.5 percent. As 2018 comes closer, OCBC’s management gave a loan growth guidance of seven percent to eight percent. This comes as the asset quality for OCBC begins to stabilise and most provisions have been done during the previous quarter.

Key risks remain with OCBC will be the inability to generate revenue with the improved NIM and failure to generate earnings from its wealth management or insurance income contribution. Analysts from DBS Research gave OCBC a “Buy” call with a target price of $13.50.

United Overseas Bank

As Singapore’s residential property market starts to recover, UOB is expected to be the best proxy for residential property loans given their lion share they have in this segment. In addition, movements have been seen in the SIBOR/SOR which will result in a higher NIM for UOB. Meanwhile, asset quality has significantly improved since troubles from the oil and gas sector have been largely settled.

Going forward, a large NPL should be written off in 4Q17 and should be the last of the year. Quality of assets should be stable thereafter and a strong pickup in loans is expected, given the rebound in Singapore’s property market. Analysts from DBS Research gave UOB a “Buy” call with a target price of $27.50.