Singapore banks seen profiting as rising rates bolster margins

SINGAPORE (Bloomberg) - Singapore's three major banks are poised to benefit from gains in local interest rates, which could signal bigger profits from their domestic lending.

The three-month Singapore interbank offered rate, or Sibor, has more than doubled this year to just over 1 percent, the highest since December 2008. If rates continue higher, DBS Group, United Overseas Bank and Oversea-Chinese Banking Corp could reverse a squeeze on their net interest margins, the difference between the interest they charge for loans and pay out to depositors.

Singapore banks are "at a turning point," said Ivan Tan, a Standard & Poor's analyst. "The rise in margins would mark an important reversal after several years of compression, and has important revenue implications."

The three banks derive about 60 per cent of revenue from interest income at their core lending businesses, Tan said.

Weakness in the Singapore dollar and expectations for higher U.S. lending rates propelled Sibor's rise from December. With deposit rates climbing more slowly, the three banks should be able to boost their net interest margins from last year's 1.69 per cent average, Tan said.

As Singaporean rates fell after the global financial crisis, the trio's average net interest margins dropped from as high as 2.2 per cent in 2009, according to data compiled by Bloomberg. If Sibor rises to the 2.5 per cent to 3 per cent level and stays there, those margins could once again move above 2 per cent, Tan said.

That would contrast with China, where margins are shrinking after the central bank cut interest rates and as competition to attract deposits intensifies.

A continued advance in Singapore's interest rates "should give us some tailwind," DBS Chief Executive Officer Piyush Gupta said last month.

Still, the benefits may be reduced because of a move in January by the Monetary Authority of Singapore to require local banks to hold enough easy-to-sell assets to survive a 30-day credit squeeze, which has sparked a "deposit price war," according to Tan.

Singapore's fixed rate for three-month deposits rose in the first two months of this year to 0.16 per cent, according to the MAS, after staying at 0.14 per cent for most of the previous three years.

About 43 per cent on average of loans at the three banks were denominated in the local currency in 2014, according to Maybank Kim Eng Research Pte. Such loans are mostly tied to either Sibor or the Singapore swap offered rate, or SOR, which has also been rising.

DBS's net income will rise 5.6 per cent to $4.27 billion this year, according to the median estimate of 23 analysts compiled by Bloomberg. UOB is forecast to see a 0.8 per cent increase, while OCBC is seen boosting profit by 1.2 per cent this year, the data show.