Singapore's largest banks are bracing for lower interest rates by increasing their deposits, particularly those with longer maturities.
DBS Group Holdings Ltd., Oversea-Chinese Banking Corp. Ltd. (OCBC) and United Overseas Bank Ltd. reported higher net income for the second quarter ended June 30, driven by fee income growth and reduced provisions. Despite macroeconomic uncertainty and an anticipated shift in global monetary policy, all three banks expect to meet their profit targets for the remainder of 2024.
DBS' outgoing CEO, Piyush Gupta, projects the bank's net profit growth for 2024 to be in the "mid- to high-single-digit" range, with total income growth in the high-single digits. During the bank's Aug. 7 earnings call, Gupta said DBS is preparing for a potential economic slowdown and associated interest rate risks. The bank has set aside S$4 billion in general allowances to mitigate unexpected risks and has added about S$60 billion in fixed-rate assets.
"What we have done over the past year is to prepare for a new environment," Gupta said. "A lot of our CASA (current account savings account) balances have gone into fixed deposits and are therefore less sensitive to rates on the way down. More importantly, we have added duration, which is now about three to three-and-a-half years."
Earnings momentum
Analysts are expressing concern about the bank's earnings momentum for the second half, as the US Federal Reserve is expected to make its first rate cut in September. Although the Monetary Authority of Singapore primarily uses currency as its main monetary policy tool, Singapore's interest rates are influenced by global monetary policy due to its open, trade-dependent economy.
"We are seeing slowing sequential earnings momentum as net interest income decelerates from falling margins and low credit growth. As a result, we expect second-half momentum to be slower than the first half," said Thilan Wickramasinghe, head of research at Maybank Securities Singapore, in an email to S&P Global Market Intelligence.
OCBC CEO Helen Wong anticipates the bank's net interest margin (NIM) to fall within the lower range of 2.2% to 2.25%. To prepare for lower interest rates, the lender has invested in high-quality commercial assets. "We have made some investment in high-quality bonds. I think this is something we have started to prepare for as we expect interest rates to come down towards the end of the year," Wong said during the bank's Aug. 2 earnings call. Additionally, OCBC is increasing its issuance of fixed-rate loans as part of its strategy to mitigate the impact of rate cuts.
OCBC's strategy of investing in high-quality, lower-yielding assets leads to margin compression. CFO Chin Yee Goh said while the focus on high-quality assets supports net interest income growth, it also contributes to overall NIM compression.
Downside protection
"The banks have been adding duration to their asset yields to provide downside protection when interest rates fall. However, this hedging applies to only a small portion of the book, so NIM compression is likely to continue," said Wickramasinghe.
Ivan Tan, an analyst at S&P Global Market Intelligence, expects Singapore banks' margins to moderate by about 10 basis points over the next two years. "Overall profitability of Singapore banks will remain healthy, as the projected moderation in NIM will likely be offset by higher loan growth. We believe borrowing appetite in Singapore could be reignited as interest rates decline. Our base case assumes loan growth of 3% to 5% over the next 18 to 24 months," Tan told Market Intelligence in an email.
DBS' Gupta expects loan growth to increase if rates decrease. "We lose some income from lower interest rates but make it up with loan growth and double-digit growth in noninterest income, positioning us reasonably well for income," Gupta said. The other two major Singapore banks also expect loan growth to remain in the low single digits for 2024.
Unless there is a strong increase in loan demand, banks' interest income will likely remain under pressure, Wickramasinghe said. But there are some positive trends. Singapore has benefited from regional wealth flows and banks have captured a significant share.
"While most of these flows were in passive fixed deposits, we are now seeing clients move funds into higher-risk investments, which generate higher fees. We expect this momentum to accelerate, particularly in a rate-cut scenario, offsetting some of the weakness in net interest income," Wickramasinghe noted.