12 Aug, 2021

Stronger economic growth may help offset Singapore banks' margin squeeze

By Regina Liezl Gambe, Rebecca Isjwara, and Rehan Ahmad


Margins at Singapore's banks are likely to stay under pressure amid low interest rates and ballooning deposits. But stronger loan growth as the economic recovery gathers speed may prevent net interest margins from falling further, analysts say.

Oversea-Chinese Banking Corp. Ltd., the second-biggest Singapore lender by assets, said that its NIM edged higher to 1.58% in the quarter ended June 30, from 1.56% in the previous three months. Rivals DBS Group Holdings Ltd. and United Overseas Bank Ltd. said their NIMs continued to fall, though the pace of decline was shallower. DBS Group's NIM in the June quarter was 1.45%, from 1.49% in the previous three months, while UOB's NIM was 1.56% in the April-to-June period, versus 1.57% in the March quarter.

"We are seeing signs of NIMs stabilizing. Part of the margin pressure is due to excess liquidity via deposits. As loan growth starts to pick up, we expect this liquidity to be placed towards higher-yielding assets, mitigating some of the downward pressure," Thilan Wickramasinghe, head of research Singapore at Maybank Kim Eng said.

Singapore now expects its GDP to grow between 6% and 7% in 2021, up from its earlier forecast of between 4% and 6%. The economy expanded 14.7% year over year in the second quarter, the government said Aug. 11, revising its initial estimate of 14.3% growth. The island nation has one of the best vaccination rates in the world and has begun to ease social distancing restrictions as 72% of the population is fully vaccinated and 81% has received at least one dose, the Ministry of Health said, also on Aug. 11.

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Profits, dividends

All three lenders posted a double-digit year-over-year increase in profits for the second quarter and signaled their comeback to pre-pandemic levels of dividend payouts. DBS, Southeast Asia's biggest bank by assets, declared a first-half dividend of 51 Singapore cents per share, up from 33 cents per share a year earlier.

"With asset quality stabilizing, we believe that banks' confidence in raising dividends will not likely be reversed," said Andrea Choong, an equity research analyst at CGS-CIMB Securities. "While we see scope for stronger growth on hopes that regional economies re-open, the banks are slightly more conservative with more modest growth projections in [the second half]."

Singapore's banks are aiming for loan growth to stay in the mid-to-high single digit range in 2021, said Krishna Guha, equity analyst at Jefferies. "Mortgage, deal-related lending, as well as some pick-up in non-trade corporate loans should help to achieve them," Guha said, adding the way the pandemic evolves and the level of fiscal support from governments will likely decide the course next year.

Even with high vaccination rates, the growing number of COVID-19 cases stemming from the more contagious Delta variant can become a drag on the economy.

"While the banks are guiding for high single-digit loans growth for full-year 2021, we believe the highly contagious spread of the delta variant will continue to impede overall economic recovery. We are maintaining our forecasts at mid-single-digit loans growth for [2021]," said Terence Chua, a senior research analyst at Phillip Securities Research.

With NIMs now significantly lower, Singapore's banks have increasingly leaned on fee incomes to mitigate margin pressure. Chua noted that three banks reported an average of around 22% growth in fee income for the quarter. "For the rest of 2021, we continue to expect the banks to make substantial headway in diversifying their revenue towards fee income," Chua said.

DBS logged a first-half net fee income of S$1.82 billion, up 20% from S$1.51 billion in the prior-year period. Meanwhile, OCBC's net fee income increased 17% to S$1.15 billion in the first six months of 2021, driven by broad-based growth, while UOB logged a first-half net fee income of S$1.23 billion, up 28% year on year.

As of Aug. 11, US$1 was equivalent to S$1.36.