Liquidity risks seem low for banks in Singapore, with Singapore banks seeing their FY2023 liquidity coverage ratios (LCRs) higher than the levels seen in FY2022, say Bloomberg Intelligence credit analyst Rena Kwok and senior industry analyst Sarah Jane Mahmud. This is to ensure that the banks have funding resilience amid tighter liquidity and the recent liquidity troubles seen in the US banks and Credit Suisse in Switzerland, they add.
Liquidity is important for financial institutions and commercial banks as they have to have enough liquid assets to remain viable in terms of meeting withdrawals from their depositors and other near-term obligations.
In her June 6 report, Kwok notes that Singapore’s lenders’ LCR ratios remain healthy as at 1QFY2023 despite the rising interest rates as the net cumulative outflow driven by deposit profiles is modest. The healthy LCR ratios were also attributable to the banks’ pre-emptive increase of their deposit rates to garner more stable deposits while boosting a higher share of high-quality liquid assets (HQLA). In addition, the outflow of deposits to the digital banks has been limited as deposits in Singapore’s three banks comprise some 73% of the sector’s deposits in March. (LCRs ensure that banks have sufficient HQLA to meet cash outflows for 30 days.)
As of 1QFY2023, United Overseas Bank U11 ’s (UOB) LCR ratio was the highest among its peers while DBS Group Holdings saw the lowest increase in total net cash outflows on a y-o-y basis compared to its peers. UOB also saw the highest y-o-y rise in HQLA at 26% compared to its peers.
With Singapore banks competing to offer its clients attractive deposit rates, with the highest quoted rate on a 12-month fixed deposit at 13% in 1Q2023 compared to 5.3% in 4Q2022, the elevated funding costs could weigh more on the net interest margins (NIMs) of Oversea-Chinese Banking Corporation (OCBC) and UOB. Banks have weaker current account, savings account (CASA) ratios, compared to DBS, which makes them more vulnerable to rising interest expenses.
However, DBS’s lower borrowing cost and CASA ratio of 57% - which outpace its peers – could also be at risk as the bank saw the sharpest CASA decline among its local peers at 18 percentage points y-o-y in 1QFY2023. OCBC O39 and UOB’s CASA ratios fell by 15 and eight percentage points respectively on a y-o-y basis in the same period.
See also: DBS and Japan Finance Corporation sign MOU to support regionalisation of Japanese SMEs
As at 4.43pm, shares in DBS, OCBC and UOB are trading at $31.17, $12.65 and $27.99 respectively.
