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Singapore banks face challenging outlook as loan demand slows

Singapore banks are likely to face muted results in the second half of 2023 after higher interest rates boosted profits in the first six months of the year.

DBS Group Holdings Ltd., Oversea-Chinese Banking Corp. Ltd. and United Overseas Bank Ltd. recently reported double-digit year-over-year increases in net profit for the second quarter, driven by strong net interest income growth. However, loan growth has slowed. The Monetary Authority of Singapore reported a decrease in bank loans to S$799.292 trillion in June from S$841.525 trillion a year earlier.

Loan growth has "been disappointing," reflecting weaker customer demand due to high loan repricing, Thilan Wickramasinghe, head of equity research at Maybank Securities, told S&P Global Market Intelligence in an email. "Unless there is a significant increase in credit demand, we anticipate that earnings will decrease in the second half of the year."

Singaporean banks have benefited from rising interest rates since early 2022, when most central banks began tightening policy to combat inflation. Lenders were able to pass higher rates on to their borrowers as economies emerged from the COVID-19 pandemic. Tightening has slowed in recent months, and most economists believe that interest rates are about to peak.

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"The banks' earnings in the first half exceeded expectations. Interest income was stronger than anticipated, primarily due to net interest margins holding up. However, there are indications that this trend may be weakening," Wickramasinghe said.

Challenges ahead

Bank chiefs have also flagged a more challenging second half of the year.

DBS' total loans in the first six months of 2023 stood at S$415.71 billion, down from S$424.53 billion in the first half of 2022. OCBC's total loans for the first half totaled S$297 billion, compared to S$298 billion in the prior-year period. UOB's net customer loans for the first half dropped to S$314.65 billion from S$317.53 billion in the first half of 2022.

DBS CEO Piyush Gupta expects "low single-digit loan growth" for the full year. "Our pipelines through the second half of the year are looking reasonable, so I think for the full year we could still get low single-digit loan growth, but it will not be the earlier guidance of 3% to 5%," Gupta said during the bank's Aug. 3 media briefing.

OCBC and UOB also expect single-digit loan growth for 2023.

At OCBC's Aug. 4 earnings briefing, CEO Helen Wong predicted "low to mid-single-digit loan growth potentially at the lower end," even as the bank still sees opportunities to increase its loan portfolio in segments such as energy, power and utilities. UOB also expects "low to mid-single-digit loan growth" and will focus on high-quality customers, CEO Ee Cheong Wee said in a July 27 briefing.

All three banks reported second-quarter net profit growth as interest rates boosted income. Net interest margins (NIMs) also improved due to unexpected rate hikes from the US Federal Reserve in July.

Margin surprise

In the second quarter, DBS Group's NIM increased to 2.16% from 1.58% a year ago. OCBC's NIM rose to 2.28% from 1.71%, while UOB's NIM went up to 2.13% from 1.63% a year ago.

DBS' Gupta said the NIM growth was a "bit of a surprise" as the CEO had previously predicted NIMs may peak between 2.05% and 2.10% this year.

The higher NIMs could help banks maintain profit growth for the rest of 2023 as margins are higher than they were in the second half of 2022, Michael Makdad, equity analyst at Morningstar, told Market Intelligence.

"It's sufficient for profit growth year on year even without loan growth and feeble recovery in fee income. Hopefully, the recovery in fee income gains pace, but that probably depends on market sentiment, as wealth management fees are sensitive to market conditions," Makdad said.

Makdad, however, expects flat NIMs in the second half and margins to eventually narrow in early 2024. Banks can maintain their "double-digit profit growth overall in the second half, but not in 2024 as year-earlier comparisons get progressively more challenging," Makdad said.

As of Aug. 11, US$1 was equivalent to S$1.35.