NIMs have only inched up by 2-12 bp since 2015 even as the 3M SIBOR soared 58bp.
Although a rising interest rate environment bodes well for banks in Singapore, the spectre of rising funding costs is dimming the expectations of fatter margins, especially for local banks who are trailing behind their foreign counterparts in the war for fixed deposits (FD).
The local banks’ net interest margin (NIM), a common measure of profitability, has only expanded by 2-12 basis points since the beginning of normalising interest rates in December 2015 (+200bp) even as the 3M SIBOR has surged 58bp over the same period, Andrea Choong, analyst at CIMB said in research note.
Only DBS was able to report a constant improvement in customer loan spreads in 2018 to book a NIM of 1.86% in Q3 whilst its two peers struggled. The NIM of OCBC remained stagnant at 1.72% in Q3 on the back of hefty increases in deposit costs whilst UOB’s NIMs have been on a gradual decline since Q1 2018 to fall to 1.81% in Q3 with the bank’s 43% CASA ratio ranking the lowest amongst the three local banks.
“NIMs have yet to capture the full benefits of higher rates as funding costs have risen (48-53bp) about as much as asset yields (46-50bp) have in this period as banks focus on building healthy liquidity buffers,” she added. “In our view, margin expansion in the coming quarters will depend on banks’ ability to reprice assets above the impending rise in deposit cost.”
Banks in Singapore can expect an earnings boost owing to the tightening monetary policy charted by the Fed which Singapore’s currency policy follows closely. Every 25bp increase in interest rates that re-prices the SGD, HKD, and USD loan book is tipped to translate into a c.3-bp improvement in NIM and a 2% accretion to bank, DBS Bank Research said in an earlier report.
However, the earnings boost is likely to lag by around three to six months pushing banks to compete for fixed deposits on the back of steep interbank borrowing costs. The 3M SIBOR has already risen to an average of 1.75% in November 2018 compared to 1.24% in December 2017.
In response, competition in the FD rate landscape has been heating up with promotional rates amongst domestic systemically important banks (DSIBs) for a minimum placement of S$20,000 for a 12-month tenure already reaching as high as 1.88% p.a.
“Whilst most of these campaigns are slated to expire by end-January, we expect the stiff deposit-taking competition to persist with refreshed campaigns or a broad-based increase in board rates as interbank lending rates continue to rise,” said Choong.
On that front, foreign banks are set to lead the FD rate competition despite their smaller branch network that makes it challenging to garner meaningful CASA deposits.
“Despite local banks’ significantly larger branch and CASA networks than foreign banks, we understand that the former [foreign banks] have had to offer more attractive rates to defend market share. Customer deposits cost Singapore banks an average of 0.86-1.4% in 9M18 whereas other funding sources were significantly more expensive at 1.82-2.47%,” she added.
“The Fed’s dovish outlook on interest rate policy forms the base of our house view of three hikes in 2019F and, consequently, a 6-9bp NIM increase in 2019F.”
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