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Singapore banks to remain major trade financiers as global commerce returns

Singapore's local banks will likely see growth return in their trade financing business once global commerce flows resume, given the island nation's unique geographical position as a major transshipment hub, analysts say.

The COVID-19 pandemic has hurt global trade flows this year, and Southeast Asia has been no exception. Singapore's three banks — DBS Group Holdings Ltd., Oversea-Chinese Banking Corp. Ltd. and United Overseas Bank Ltd. are active trade financiers and are expected to have faced the drag from slower shipments. But, as nations emerge from stricter lockdowns and global trade starts to flow again, Singapore will likely gain from a new cycle of imports and exports once households resume buying and demand returns.

The recent ratcheting up of tensions between the world's biggest economies may cause changes to supply chains in the region as companies seek to protect themselves from potential sanctions that the U.S. might impose on companies operating in China. The U.S., Japan, Australia and India have revived their strategic cooperation under their so-called Quadrilateral Security Dialogue, or QUAD, seen as a counter to China. But any possible changes to the supply chains are unlikely to significantly impact Singapore or its banks.

"Trade is already growing and will continue to grow even if the tensions worsen or protectionism increases," said Song Seng Wun, an economist at CIMB Private Bank. "In the grand scheme of things, trade into and from China will also keep growing as the economy is growing. You may have some relocation of supply chains, and that will only add another layer to the trade-related activities flowing through Singapore."

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Singapore is a global port visited by nearly 130,000 ships each year. A vessel arrives or leaves the city every two to three minutes and the maritime industry accounts for nearly 7% of GDP, according to the Maritime and Port Authority of Singapore. That makes Singapore a bellwether for global trade.

"Singapore's strategic location and political stability provide a competitive advantage for its banks, especially during times of uncertainty like these," said Yap Kwee Hong, head of global trade finance, global transaction banking at OCBC Bank. "This has led to many corporates, procurement or trading houses and treasury centers choosing Singapore as a base."

The government is helping, too, Yap said, pointing at the Loan Insurance Scheme, which helps Singapore-based companies to get trade financing from participating financial institutions. These loans are protected by insurance and the government pays a part of the premium.

The nation's banks have expanded their trade financing activities across various parts of Asia. "The fact that Singapore does have a regional reach around Southeast Asia could be a net benefit for Singapore banks," said Michael Wu, a senior equity analyst at Morningstar.

Unlike Hong Kong banks, which are primarily focused on capturing trade opportunities within the Greater China region, Singapore banks are "better positioned to take advantage" of intraregional trade in Southeast Asia, he said.

The banks' profitability in the trade finance business is not high but lower spreads can be offset by a boost in volume, Wu added.

Singapore's banks have sought to curb their costs via increased digitization in recent years. Almost half of OCBC's trade transacting customers are now sending in their applications via its internet banking platform, and the number of digitally active trade customers has tripled from 2019, Yap said.

Going digital has shaved operational costs for DBS Bank, too. The bank's head of trade product management, Sriram Muthukrishnan, said supply chain finance income has increased about 20% year over year in the first five months of 2020. However, overall transaction volumes saw some decline through that period.

Signups for its digital platform for trade financing activities also increased by 25%, he said. The bank is encouraging customers to send data and trade-related documents online to conduct the entire transaction process virtually.

As of July 22, US$1 was equivalent to S$1.38.