KUALA LUMPUR (March 14): S&P Global Ratings said Singapore banks are readjusting, and in 2022, they benefited from fatter margins on rising interest rates.
In a statement on Tuesday (March 14), the rating agency said they now face the second part of the story, when rates and inflation feed through to higher funding costs and lower loan appetite.
S&P Global Ratings credit analyst Ivan Tan said that overall, profitability will remain good for Singapore banks in 2023.
“But margins will peak, and tepid loan growth will crimp further upside,” he said in conjunction with a report published on Tuesday (March 14) titled “Singapore Banks 2023 Outlook: A Strong Start With Some Fade”.
S&P said net interest margins (NIMs) look set to peak this year, after consecutive quarters of rising asset yields throughout 2022.
It said Singapore’s overnight and interbank rates have been rising in tandem with the US Federal Reserve’s hikes.
Policy rates are also on the uptrend in all of the major overseas markets where Singapore banks operate, with the exception of China, the agency added.
S&P said Singapore banks are well-positioned to take advantage of tightening cycles; the majority of their floating rate loans have quickly repriced upward, while their balance sheets remain flushed with liquidity and low-cost customer deposits.
It said the upside on interest margins will likely start tapering and peak in the middle of 2023, in line with the likely cresting in the Fed’s rate cycle.
At the same time, it said funding costs are starting to catch up.
S&P said depositors have been shifting into higher-yielding fixed deposits, and the proportion of low-cost current and savings account deposits has steadily declined over consecutive quarters.
It said borrowing appetite will likely moderate this year.
S&P forecast loan growth in low- to mid single digits in 2023.
It said systemwide gross loans for Singapore commercial banks have declined for three consecutive months since September 2022.
This coincided with a spike in lending yields, which will continue to weigh on consumers and businesses this year, it said.
Tan said other headwinds on credit demand include property-cooling measures in Singapore and recession risk for major economies. China’s reopening will provide some offset.
“The realities of higher borrowing costs, coupled with still elevated inflation, will register more prominently in 2023,” he said.
Tan said gross NPL ratios for banks could weaken slightly over the next 12-18 months.
The banks also have exposure to economies in Indonesia and Thailand, where the level of restructured loans remains elevated post Covid, he added.
“In our view, rates and global recession risk will dampen, but not derail, momentum. Rated banks in Singapore have adequate capitalisation and good provisioning buffers to absorb changes in business cycles,” said Tan.