Singapore banks forced to readjust in 2023: S&P

After benefiting from larger margins on rising interest rates in 2022, ratings agency S&P says Singapore banks are now facing higher funding costs and a lower loan appetite amid rising rates and inflation.

“Overall, we believe profitability will remain good for Singapore banks in 2023, but margins will peak, and tepid loan growth will crimp further upside,” said S&P Global Ratings credit analyst Ivan Tan.

Tan’s comments came as the agency published a new report titled Singapore Banks 2023 Outlook: A Strong Start With Some Fade.

The report noted significant speed bumps facing Singapore’s banking sector, but the city-state’s financial sector appears likely to avoid the problems facing banks in the U.S. and elsewhere in the world.

“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,” said Tan.

Recently, Singapore’s overnight and interbank rates have been rising in tandem with the U.S. Federal Reserve’s hikes. While policy rates are also on the uptrend in all of the major overseas markets where Singapore banks operate, with the exception of China. 

At the same time, S&P notes funding costs are starting to catch up. 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. 

Singapore borrowing to moderate

S&P anticipates borrowing appetite in the Singaporean economy will moderate in the remainder of 2023, forecasting loan growth in low-mid single digits.

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. 

Tan says other headwinds on credit demand include property-cooling measures in Singapore and recession risk for major economies, while China’s reopening will provide some offset.

“The realities of higher borrowing costs, coupled with still elevated inflation, will register more prominently in 2023,” said Tan.

“In our view, rates and global recession risk will dampen, but not derail, momentum. Rated banks in Singapore have adequate capitalization and good provisioning buffers to absorb changes in business cycles.”