Debts everywhere: Loan-to-deposit ratio hits 16-year high in May

Domestic deposits continue their 2-month decline.

Singapore's companies are borrowing more and saving less, while domestic banks are struggling to retain and attract deposits. Data released today by the Monetary Authority of Singapore revealed that domestic banking unit (DBU) deposits were down 0.3% month on month in May, while DBU loans climbed by 1.1%.

A report by Barclays noted that system loan-to-deposit ratio (LDR) jumped to 110.6% in May, from 109.4% in April, another record high since 1998.

"The May monetary statistics from the Monetary Authority of Singapore (MAS) show that deposits contracted for the second consecutive month. DBU deposit base has experienced no growth while DBU loans rose 13% y/y. The system loan-to-deposit ratio (LDR) jumped to 110.6% in May, from 109.4% in April, another record high since 1998. Deposit competition will continue intensify, in our view," noted the report.

Here’s more from the report:

Growth in May was mainly driven by DBU corporate loans (+1.5% m/m) in general commerce and business (+2.7% m/m), financial institutions (2.3% m/m), and manufacturing loans (+2.2% m/m). Growth in non-housing retail loans slowed to 0.2% m/m.

System deposits contracted for the second consecutive month, down by 0.3% m/m in May (Apr: -0.8% m/m), mainly led by a 0.8% m/m fall in DBU deposits. DBU deposit base has fallen by 0.7% y/y and 0.2% ytd. ACU deposits increased 0.5% m/m in US$ terms and 2.6% ytd.

As loans grew and deposits contracted, system LDR climbed to 110.6% in May (April: 109.4%), another record high since 1998. We believe funding costs will rise as banks compete on pricing to retain and attract deposits.

Moreover, with the implementation of the Basel III liquidity rules (including the Liquidity Coverage Ratio and the Net Stable Funding Ratio), we believe banks will increasingly focus on deposit funding both in SG$ and in foreign currency. The three local banks have said that currently they are comfortably placed to meet the rules.

DBS (OW) remains our top pick among the Singapore banks given its strong deposit franchise and positive leverage to rising rates, followed by UOB (OW) which has strong fee income generation capability and a solid risk management track record.

We rate OCBC as UW as we believe it will have to raise capital to fund the acquisition of Wing Hang Bank, which remains the major overhang.