Higher rates won't rescue banks' thinning margins, analysts warn

There are few growth catalysts in 2016.

If 2015 holds any clue as to what awaits Singapore banks next year, then analysts are not too bullish on the effects that higher interest rates will have on lenders’ margins.

A report by DBS highlighted that the spike in short-term interest rates in the 2015 did not fully translate to higher margins for banks, as surplus liquidity from the decline in greenback-denominated trade loans led to a redeployment to lower-yielding assets.

Although the SIBOR is expected to rise to 1.4% by the first quarter of 2016, DBS said that its effect on interest margins will not be as high as expected.

"We have imputed slightly higher NIM in 2016 to account for the expected rate hike but we believe the NIM uptick may be muted as: (1) we expect funding costs to catch up, dampening the impact of loan yield increases on NIM; (2) in addition, with the S$ loan-to-deposit ratio now at a high of 87% from 79% two years ago, there may be little room left for banks to leverage on; and (3) the wildcard on whether Singapore banks still carry surplus US$ liquidity may dampen overall asset yields and hence NIM," said DBS.

“If the excitement of the NIM spike for the Singapore banks cools off, there leaves hardly any drivers for growth in 2016. Judging from the trends we have seen in 2015, we believe that even with the Fed rate hikes, there is not much room for NIM to rise significantly,” the report added.