Singapore's banks have suffered a decline in NIMs amid falling interest rates. Source: Thinkstock

Singapore's three biggest lenders by assets will be able to pass on higher interest rates from tighter monetary conditions to their customers, allowing them to improve their margins in the second half of 2022.

Net interest margins at DBS Group Holdings Ltd., Oversea-Chinese Banking Corp. Ltd., and United Overseas Bank Ltd. have stopped falling and are poised to move higher as global interest rates start to rise.

Singapore's central bank on Jan. 25 tightened further in a rare action between its regular monetary policy reviews, citing an upshift in the country's inflation outlook. The Monetary Authority of Singapore, which uses currency as its key monetary policy tool, set the local dollar on a faster pace of appreciation against its peers, following up on its initial tightening move at its regular policy review in October 2021. Local banks expect the U.S. Federal Reserve to hike rates four times this year for a total of 100 basis points.

Tighter monetary conditions will help NIMs to improve, said Glenn Thum, a Singapore-based research analyst at Phillip Securities Research. "However, the flow through to banks may not happen immediately. ... I would expect NIMs to remain stable during the first half with some uptick in the second half," Thum said.

Downward spiral

Singapore banks' NIMs spiraled lower in the last two years due to prior rate cuts to ease the economic drag of the pandemic. DBS reported the lowest NIM among the trio in 2021, at 1.45%, compared with 1.89% in 2019. Still, all three banks posted net profit gains in 2021, helped by growth in fee income.

Fee income has shown record growth, and "with the economic environment improving, we should expect this to continue into 2022," Thum said.

Recovery in the economy will drive demand for credit and help the three banks grow their loan books. Singapore's economy expanded by 7.6% in 2021, rebounding from the 4.1% contraction in 2020, the government said Feb. 17. It expects GDP to grow between 3% and 5% this year.

The loan growth guidance reflects "the overall recovery in the region," said Michael Wu, senior equity analyst at Morningstar. "I think overall there is going to be continued growth in fiscal 2022 from the economic improvement."

The banks' expected growth in credit comes in tandem with improving asset quality. At the start of the pandemic, the banks cushioned against bad loans by front-loading provisions, some of which they will be able to write back. "At a group level, the three banks are well provisioned," Wu said.