Bank earnings to be upheld by higher rates
SINGAPORE: Singapore banks are expected to benefit as their margins are propped up by higher-for-longer interest rates, but headwinds remain in areas such as loan demand, say analysts.

DBS Group Holdings and OCBC Bank started the year strong with earnings that rose to new highs, boosted by factors such as higher fee income due to stronger market sentiment.

At Singapore’s largest lender DBS, net profit for the first quarter increased 15% to S$2.95bil. OCBC, which on May 10 was the last to report its results, saw its first-quarter net profit grow 5% to S$1.98bil.

However, UOB had a muted start to 2024 as its net profit fell 2% to S$1.49bil, amid higher funding costs and increased competition for high-quality loans.

Willie Tanoto, a senior director in Fitch Ratings’ Asia-Pacific financial institutions team, told The Straits Times that higher-for-longer interest rates have lengthened the runway for the three banks’ net interest margins (NIMs), and expects that this will help the lenders sustain revenues above 2023’s record levels.

“Market expectations of delayed US Federal Reserve (Fed) rate cuts are keeping asset yields high, but as banks get more clarity that rates have peaked, they are able to adapt their funding strategies to reduce deposit costs,” he said.

“We believe the three major Singapore banks have strong market positions and pricing power in the Singapore home market to manage their funding costs effectively while maintaining a stable deposit base,” he added.

The banks’ chiefs said in their results briefings that they were optimistic about their NIMs, which measure the difference between the interest income earned by banks and the amount of interest paid out to depositors.

This comes as the Fed has held interest rates steady, even as it earlier predicted three rate cuts in 2024.

For example, UOB group chief financial officer Lee Wai Fai said the bank’s NIM held up stronger than expected, despite the margin falling to 2.02%, down from 2.14% a year ago.

“I personally expect some positive upside in the short term because we have cut rates on deposits. A lot of that will flow through in the second and third quarter,” he said at the lender’s results briefing on May 8.

Phillip Securities senior research analyst Glenn Thum said players are now mainly concerned about funding costs that have been edging up.

The banks have already moved to cut fixed deposit rates, he noted.

Funding costs for current and savings accounts are low, so it is unlikely that customers will see more interest rate cuts on those products for now, especially as the Fed holds rates steady, added Thum.

Thilan Wickramasinghe, Singapore research head and regional financials head at Maybank Investment Banking Group, said the sector has ample liquidity, especially in the current slower loan growth environment.

“So we think the banks may be able to afford to cut deposit rates and still have defensible loan-to-deposit ratios,” he said.

Meanwhile, Tanoto said higher interest rates are also likely to keep loan demand subdued as companies hold back on making significant investments and borrowers seek to pay down debt due to high financing costs.

“Given elevated geopolitical and macroeconomic uncertainties, we do not expect loan demand to recover meaningfully in 2024,” he said.

The lenders’ loans grew between 1% and 3% in the first quarter, compared with a year ago and on a constant-currency basis.

Wickramasinghe expects that loans will recover in the second half of 2024.

“Companies are still operating on a recession mentality, holding back costs and investments. However, many regional governments from Indonesia to Thailand are expected to boost public spending in the second half, and China is looking to support its domestic economy too,” he said, adding that this will contribute to more investment demand in South-East Asia.

A bright spot was non-interest income, even if the prospect of higher-for-longer rates might dampen investor sentiment. Non-interest income is generated from areas such as wealth management and card fees. — The Straits Times/ANN
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Singapore banks are expected to benefit as their margins are propped up by higher-for-longer interest rates, but headwinds remain in areas such as loan demand, say analysts.