Investors should start positioning defensively in Singapore banks: Barclays

As risks of Fed tapering have risen.

"Heading into 2014, we believe investors should position themselves defensively in those Hong Kong and Singapore banks that have a strong deposit franchise (in case of system fund outflows) and also those which are most leveraged to rising interest rates," advised Barclays Research.

"Interest rates in both Hong Kong and Singapore tend to closely track US rates. We believe Fed tapering and tightening could affect margins of the banks, system liquidity, deposit competition, loan growth, asset quality, and property prices, while our global asset allocation team believes there is a risk that Fed tapering and tightening occur earlier than the market is pricing in," it added.

Barclays said the risk of Fed tapering and tightening coming earlier-than-expected.

Barclays global asset allocation analyst Jim McCormick believes the risks of an early beginning for Fed tapering have risen (current estimate from the US economics team is for March 2014) with the recent improvement in US payrolls and also the tone of the latest Fed minutes.

McCormick also believes the market may have pushed out the time gap between the start of tapering and the first Fed tightening a little too far.

In predicting teh impact of tapering and tightening on the HK and Singapore banks, Barclays sadi fund flows could reverse when tapering begins and drive system liquidity tighter, leading to greater competition for deposits, higher funding costs, and slower loan growth.

Banks would attempt to pass on higher funding costs in the form of higher lending rates, even before benchmark rate hikes start.

"The start of Fed tightening, signaled by the first benchmark interest rate hike, is likely to further increase the borrowing cost burden for corporates and households, dampen the property market, and lead to banks asset quality deterioration in the medium-term," said Barclays.