SINGAPORE: To prepare for anticipated lower interest rates, Singapore’s leading banks are increasing their deposits, particularly those with longer maturities.
For the second quarter ending June 30, DBS Group Holdings Ltd., Oversea-Chinese Banking Corp. Ltd. (OCBC), and United Overseas Bank (UOB) Ltd. each reported higher net income.
This increase was primarily due to growth in fee income and a reduction in provisions. Despite the current economic uncertainty and anticipated changes in global monetary policies, all three banks are optimistic about meeting their profit targets for the rest of 2024.
DBS, led by outgoing CEO Piyush Gupta, forecasts net profit growth for 2024 in the “mid- to high-single-digit” range, with total income expected to grow similarly.
During an earnings call on Aug 7, he explained that DBS is preparing for a possible economic slowdown and the associated interest rate risks. To manage unexpected risks, DBS has set aside S$4 billion in general reserves and has acquired around S$60 billion in fixed-rate assets.
Mr Gupta explained that the bank has been preparing for a changing economic environment over the past year.
He noted that a significant portion of their current account savings account (CASA) balances had been shifted into fixed deposits, making them less sensitive to falling interest rates.
He also added that the bank has extended the duration of its assets to about three to three-and-a-half years. However, concerns remain about the bank’s earnings momentum for the second half of 2024.
S&P Global reported on Aug 21 that with the US Federal Reserve expected to start cutting rates in September, analysts are concerned about the potential impact on Singapore’s banks.
While the Monetary Authority of Singapore (MAS) primarily uses currency for monetary policy, global monetary policies still influence Singapore’s interest rates due to its open, trade-dependent economy.
Thilan Wickramasinghe, head of research at Maybank Securities Singapore, told S&P Global Marketing Intelligence in an email that they are “seeing slowing sequential earnings momentum as net interest income decelerates from falling margins and low credit growth.”
He added that with this, “We expect second-half momentum to be slower than the first half.”
OCBC CEO Helen Wong expects the bank’s net interest margin (NIM) to drop between 2.2% and 2.25%. To mitigate the impact of lower interest rates, OCBC has begun investing in high-quality bonds.
“I think this is something we have started to prepare for as we expect interest rates to come down towards the end of the year,” she said during an earnings call on Aug 2. In addition, OCBC has been increasing its issuance of fixed-rate loans to counter the effects of potential rate cuts.
However, OCBC’s focus on high-quality, lower-yielding assets has led to some margin compression. CFO Chin Yee Goh acknowledged that while this strategy supports net interest income growth, it also contributes to overall NIM compression.
Mr Wickramasinghe pointed out that the banks have been extending the duration of their asset yields to provide some protection when interest rates fall. However, this hedging strategy only applies to a small portion of their portfolios, meaning that NIM compression will likely continue.
Ivan Tan, an S&P Global Market Intelligence analyst, expects Singapore banks’ margins to moderate by around 10 basis points over the next two years.
According to him, while the projected moderation in NIM will pose challenges, the overall profitability of Singapore’s banks will remain healthy, with higher loan growth potentially offsetting some of the pressure.
“We believe borrowing appetite in Singapore could be reignited as interest rates decline. Our base case assumes loan growth of 3% to 5% over the next 18 to 24 months,” Tan explained.
Mr Gupta of DBS shares the same outlook, expecting loan growth to increase if interest rates decrease. He noted that while the bank might lose some income from lower interest rates, this could be compensated by growth in loans and double-digit growth in non-interest income.
OCBC and UOB also expect their loan growth to remain in the low single digits for this year.
Mr Wickramasinghe said that banks’ interest income will likely stay under pressure unless there is a significant rise in loan demand. However, there are some positive signs. Singapore has gained from regional wealth flows, and banks have secured a large portion of this.
He added that while most of these flows were initially fixed deposits, clients are now shifting their funds into higher-risk investments with higher fees. This trend is expected to grow, especially if rates are cut, which should help counteract some of the decline in net interest income.
/TISG
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