Rising interest rates should allow Singapore's banks to grow their margins further, supporting their earnings as a slowing economy threatens to crimp credit growth.
The island nation's three major banks improved their net interest margins in the second quarter ended June 30 as many central banks around the world raised their benchmark rates. The NIM of DBS Group Holdings Ltd., Southeast Asia's largest bank by assets, rose 13 basis points year over year in the quarter to 1.58%. United Overseas Bank Ltd. reported an 11-basis-point improvement in its NIM for the quarter to 1.67%, while Oversea-Chinese Banking Corp. Ltd. expanded its NIM to 1.71% from 1.58% in the prior-year quarter.
"There's quite clearly good momentum on the NIM side," DBS CEO Piyush Gupta said on a post-earnings call Aug. 4. In July, DBS Group saw its NIM rise further to 1.80%, Gupta said.
Stronger margins helped lift DBS Group's second-quarter net profit by 7% year over year to S$1.82 billion. OCBC reported a 28% rise in net profit for the quarter to S$1.48 billion, while UOB posted an 11% year-over-year rise in net profit to S$1.11 billion.
The Monetary Authority of Singapore, or MAS, was among the first Asian central banks to tighten policy as inflation reared up amid surging commodity prices. The MAS first tightened monetary policy in October 2021 and has since followed with three more moves, including in January and July in a rare departure of reviewing monetary policy settings only twice a year. Central banks in India, the Philippines and Malaysia have also tightened monetary policy. China remains an outlier, where the central bank is widely expected to continue easing to support economic growth.
NIM momentum
Singapore's lenders will likely maintain their NIM growth momentum into the second half, though funding costs will gradually increase, albeit at slower pace given the large low-cost deposits of the big three banks, said Thilan Wickramasinghe, head of research Singapore and head of regional financials at Maybank Investment Banking Group. "On the other hand, we do expect loan growth to weaken a tad, largely as macro conditions slow," Wickramasinghe added.
Glenn Thum, research analyst at Phillip Securities Research, said that the rise in net interest income from higher rates should more than offset the slower loan growth.
"The banks' management have also concurred that they do not see a recession in the near term for the economies they are in, but do expect a general slowdown in growth due to the current market conditions," Thum added.
Singapore expects gross domestic product to grow between 3% and 5% in 2022, while inflation is projected to range between 3% and 4%. Lenders are likely to face a drag on their substantial trade finance and home mortgage businesses, which are sensitive to inflation and interest rates. Home loan rates in the city-state have steadily been rising since the fourth quarter of 2021.
OCBC was the latest to raise its two-year fixed-rate mortgage rates to 2.98% in July, following its peers. Earlier, UOB increased the annual rate on its three-year fixed package to 3.08% from 2.8%, while DBS Group also revised its rates for two- and three-year fixed rate-packages to 2.75%, local media reported.
As of Aug. 3, US$1 was equivalent to S$1.38.