SINGAPORE – Singapore banks received an earnings boost from high interest rates in 2023, but they continue to face sluggish loan demand and the possibility of margins peaking.

Investor sentiment also remains fragile in the uncertain macroeconomic climate, continuing to hinder fee income growth despite the recovery in recent quarters.

Loans at DBS Group Holdings, OCBC Bank and UOB grew just 1 per cent year on year, or were flat on a constant-currency basis in the third quarter.

This comes even as net interest margins (NIMs) – a key gauge of a lender’s profitability – rose between 14 and 29 basis points at the banks, which ended their earnings season on Nov 10.

Interest rates continue to be elevated globally as the United States Federal Reserve on Nov 1 held its benchmark lending rate at a 22-year high to deal with stubborn inflation. It has hiked the rate 11 times since March 2022.

Mr Thilan Wickramasinghe, Maybank Investment Banking Group’s research head for Singapore, said it is still very unclear as to when rates will be cut, with market expectations pointing only to the second half of 2024.

“As long as interest rates stay higher for longer, it will sap away loan demand as customers either pay down loans or postpone investment decisions.”

Phillip Securities senior research analyst Glenn Thum said there is a slim chance of a slight pick-up in loans in the first half of 2024 as consumers adjust to high interest rates.

DBS and OCBC expect loans to grow at a low single-digit percentage for the whole of 2023, while UOB is guiding for a low-to-mid single-digit growth. Without adjusting for currency, loans fell 2 per cent across the lenders.

Mr Wickramasinghe expects that South-east Asia will lead credit demand when loan growth eventually turns positive, given that the region is set to grow faster than China in 2024.

“Infrastructure, manufacturing, construction and natural resources could be key sectors to watch out for as investments in China+1 supply chains accelerate,” he said, referring to a strategy of diversifying business operations beyond China.

Mr Willie Tanoto, a director in Fitch Ratings’ Asia-Pacific financial institutions team, said that even when rate cuts happen, borrowing costs will still be relatively high and companies will likely use existing liquidity. 

Emerging markets in Asia account for about a quarter of Singapore banks’ total lending, but the demand for loans might not always match lenders’ risk appetites or business strategies in these markets, he said.

“Hence, we project only low single-digit overall loan growth in 2024.”

Meanwhile, banks are pinning some of their hopes on fee income, which has recovered in recent quarters.

DBS and UOB expect it to improve from a high single-digit percentage growth in 2023 to double-digit growth in 2024.

OCBC recorded its highest net fee income in four quarters due to an increase in credit card and wealth management fees, but group chief executive Helen Wong said investors are still sitting on the fence.

Mr Tanoto said wealth management income will likely gain a stronger momentum only when investors are convinced that interest rates are on their way down.

Credit cards are enjoying re-opening tailwinds as travel picks up and consumers spend on discretionary experiences such as concerts, said Mr Wickramasinghe, adding: “As these activities reach pre-Covid levels and the base effect kicks in, we expect overall fee growth to give up momentum.”

IG Asia market strategist Yeap Jun Rong said that net fee income might hold up with improved market conditions and strong travel momentum.

But the bulk of local banks’ business is still heavily dependent on net interest income, which accounts for around 70 per cent of total revenue.

“The strong year-on-year growth momentum that we have seen over the past year may be harder to sustain in 2024, given that the bulk of the interest rate upcycle is most likely behind us.”

Mr Thum said banks will need to balance their funding costs to ensure that NIMs are held at current levels.

Their ratios of current and savings account deposits – a cheap source of funds for lenders – have recently stabilised after declining significantly in the past year.

“This is good news for the banks and they need to continue to work on maintaining this.”

Asset quality is another important area the banks will have to be watchful of, said observers.

Mr Tanoto said that given how much interest rates have risen, non-performing loan ratios are likely to normalise at slightly higher levels.

“The banks continue to hold significant general provisions that put them in a good position to manage the level of credit impairments we expect, and they have indicated that they are not detecting credit stress in any specific sectors or segments.”

While the sector has successfully navigated the challenging environment so far, higher-for-longer rates are likely to put more pressure on businesses and consumers, said Mr Wickramasinghe.

“Negative surprises and sectoral stress need to be watched,” he said, adding that another challenge is China’s slower growth, which could affect earnings in 2024. “Similarly, the rapid pace of digitalisation over the past few years could open up reliability issues for IT systems. We have already seen some outages this year, and risks of further disruptions cannot be ignored.”