SINGAPORE: The three major Singapore banks stand to benefit from the gains in local interest rates, which signal bigger profits from their domestic lending businesses: The three-month Singapore Interbank Offered Rate (SIBOR) has more than doubled since the beginning of the year to just over 1 per cent, the highest since the global financial crisis seven years ago.
If rates continue to rise, DBS, United Overseas Bank (UOB) and Oversea-Chinese Banking Corp (OCBC) could reverse a squeeze on their net interest margins. The three banks derive about 60 per cent of revenue from interest income at their core lending businesses, said Mr Ivan Tan, an analyst at ratings agency Standard & Poor’s.
“(Singapore banks) are at a turning point. The rise in margins would mark an important reversal after several years of compression and has important revenue implications,” he said.
Weakness in the Singapore dollar amid expectations that the United States Federal Reserve will raise interest rates in the world’s largest economy has propelled SIBOR’s rise since December. With deposit rates climbing more slowly, the three banks should be able to boost their net interest margins from last year’s 1.69 per cent average, Mr Tan said.
As Singaporean rates fell after the 2008-2009 global financial crisis, the trio’s average net interest margins dropped from as high as 2.2 per cent in 2009, showed data compiled by Bloomberg. If SIBOR rises to between 2.5 and 3 per cent and stays there, those margins could once again move above 2 per cent, he added.
A continued advance in Singapore’s interest rates should give us some tailwind, DBS chief executive Piyush Gupta said last month.
Still, the benefits may be reduced because of a move in January by the Monetary Authority of Singapore to require local banks to hold enough liquid assets to survive a 30-day credit squeeze, which has sparked a deposit price war, Mr Tan said.
Singapore’s fixed rate for three-month deposits rose in the first two months of this year to 0.16 per cent, said the Monetary Authority of Singapore, after staying at 0.14 per cent for most of the previous three years.
About 43 per cent on average of loans at the three Singapore banks were denominated in the local currency last year, Maybank Kim Eng Research showed. Such loans are mostly tied to either SIBOR or the Singapore swap offered rate (SOR), which has also been rising. DBS’ net income will rise 5.6 per cent to S$4.27 billion this year, based on the median estimate of 23 analysts compiled by Bloomberg. UOB’s net profit is forecast to increase 0.8 per cent to S$3.2 billion, while OCBC is seen boosting profit by 1.2 per cent this year, the data showed.
