Singapore banks may look to prioritising their funding-cost strategy as interest rates may have peaked in 2023, says Rena Kwok, credit analyst at Bloomberg Intelligence.
“[The] banks would prioritise the containment of funding costs to sustain margins in anticipation of lower interest rates in the longer-term,” Kwok writes in her April 11 report.
Instead of managing their asset yields, the banks could focus on getting high-quality deposits for long-term sustainability, she adds.
“[Banks] can do this via a strategic repricing of costlier fixed deposits, using domestic funding in its key target markets when possible, instead of using forex swaps and acquiring stickier corporate working-capital accounts and their consequent low-cost deposits,” she suggests.
Furthermore, the banks’ savings accounts can guard the outflow to money-market funds. This is despite their lower rates due to their safe-haven status and if their bonus interest rate rules are easily met.
Banks are already starting to cut their interest rates. United Overseas Bank U11 (UOB) announced, on April 1, that it will be lowering its interest rates and introducing two new balance tiers for its UOB One Account holders. The changes, which will see customers with bigger balances enjoying higher rates on their deposits, will be effective from May 1 onwards.
On April 2, Standard Chartered also said that it will be lowering its maximum interest rate to 7.68% from 7.88% on its savings account. The change will, too, be made from May 1.
DBS and Oversea-Chinese Banking Corporation (OCBC) have not announced any changes to their savings account rates yet.
“Flushed with ample liquidity and given tepid lending, these lenders may re-evaluate their customer acquisition strategies to garner high-quality deposits for longer-term sustainability,” notes the analyst, adding that DBS and OCBC may follow suit, soon.
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In a separate report also dated April 11, Kwok sees that all three local banks may defend their current account, savings account (CASA) ratios to balance their funding costs in 2024. This is so that they can maintain their net interest margins (NIMs) at 2023’s levels.
As of February, all three banks’ CASA ratios stood at about 46%, down from 48% in the year before.
Ample liquidity in system
The sector still has “ample liquidity” in its system, with its liquidity profile set to remain “robust” in 2024.
This is as the major three local banks, which have a total of 72% of the sector’s deposits as at 4QFY2023, continue to maintain “solid” loan-to-deposit (LDR) ratios in local and foreign currencies, says Kwok.
“The domestic big lenders have seen healthy deposits growth thus far, largely led by individuals who took up higher-yielding fixed-rate deposits,” she adds.
“As of February, Singapore’s banking sector Singapore dollar, foreign currency and overall LDR ratios were 71%, 68%, and 69% respectively. This implies that the ample supply of deposits is more than sufficient to fund lending activities.”
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Asset quality could face ‘mild deterioration’
In an April 1 report, Kwok sees that the sector’s robust asset quality could face a “mild deterioration” in 2024 despite the economic headwinds. The near-term elevated interest rates and inflation could weigh on borrowers' debt repayment ability, she writes.
“Early warning signs signal limited stress in riskier credit cards book and impaired loan ratios mostly below through the cycle levels,” she says, while noting that the local banks are “well-placed” to endure increases in credit losses with ample provisions.
“Banks in Singapore are well-placed to withstand these risks thanks to their beefed-up provisioning in anticipation of a potential rise in credit costs. The big local banking groups' average provision coverage was healthy at 127% in 4QFY2023, even as gross nonperforming loan ratios stood low,” she adds. “Singapore’s banking sector share of total exposures in special mention fell to 1.3% in 4QFY2023 versus 1.5% a year ago. Similarly, the sector’s share of total exposures that are nonperforming stood at a low 0.7% during the same period.”
As at 1.41pm, shares in DBS, OCBC and UOB are trading $35.66, $13.71 and $29.50 respectively.
