Singapore's largest banks may see their net interest margins expand at a slower pace in 2023 as central banks approach the limits of monetary policy tightening, bringing the lenders' fee income into focus.
Although the U.S. Federal Reserve indicated that its tightening cycle may last a bit longer, most analysts believe interest rates may be nearing a peak as global economic growth grinds lower. This could affect the profits of Singapore's three largest banks by assets — DBS Group Holdings Ltd.; Oversea-Chinese Banking Corp. Ltd., or OCBC; and United Overseas Bank Ltd., or UOB — in 2023 after rising interest rates boosted their margins in 2022, pushing their full-year net profits to record highs.
"We saw some strong improvements to NIMs. However, expect the trajectory of growth to decelerate in 2023 as funding costs catch up," Thilan Wickramasinghe, Maybank Securities Singapore's head of research, told S&P Global Market Intelligence. "Asset quality remains benign. Provisioning costs could have upside risks going forward, especially as the full impact of higher interest rates and slower global growth starts to bite."
Singapore was one of the first Asian countries to embark on a tightening cycle as early as October 2021. While rising policy rates boosted banks' NIMs, they have also pushed their cost of borrowing higher.
Improved margins
Margins at the banks rose year over year for full year 2022. DBS Group reported a NIM of 1.75% in 2022, up from 1.45% in 2021. OCBC posted a year-over year increase in its NIM for the period to 1.91% from 1.54%, while UOB's NIM rose to 1.86% from 1.56%.
"Net interest margin may be peaking out but unlikely to narrow much if at all in 2023, assuming there is no sudden development prompting the U.S. Fed to cut interest rates aggressively," Michael Makdad, senior equity analyst at Morningstar, told Market Intelligence via email.
Analysts expect the major banks to continue to see strong earnings in 2023. The mean consensus estimate for DBS Group's net income for full year 2023 was S$9.90 billion, according to data compiled by Market Intelligence on March 1. OCBC's net income is estimated to come to S$6.95 billion for full year 2023, while UOB's net income is expected to be S$5.63 billion.
Wild card
As the margins of the three large Singapore banks may have little room to rise further, fees from wealth management could be a growth engine for the lenders in 2023.
"The contribution from wealth management, which has seen major contraction, remains a wild card," Wickramasinghe said. "On one hand, all three banks have seen credible [assets under management] inflows, but on the other hand, for clients to deploy these to higher fee paying products, the outlook for interest rates needs to be clearer."
Piyush Gupta, CEO of DBS Group, said during the bank's Feb. 13 earnings call that the lender can expect an increase in revenue as its AUM keeps increasing. The bank's reported wealth management AUM increased 3% in constant currency terms to S$297 billion in 2022 from S$291 billion in 2021.
"There is a dependent benefit because, for example, a lot of the AUMs that are coming in are now ultra high net worth, family office kind of stuff and that allows us to create two, three additional ecosystems," Gupta said.
