Not a time to cheer up yet: Two ways on how Indonesia tax amnesty could hurt Singapore banks

OCBC's assets seen most exposed than peers.

The declaration and repatriation of overseas assets of Indonesians has sped up as the tax amnesty programme completed its first trimester on 30 Sep. Indonesia’s tax officials said that declaration of assets in Singapore is IDR666.4t (SGD70.3b), of which IDR79.13t (SGD8.3b) has been repatriated.

While the total amount of assets repatriated from Singapore poses minimal impact to Singapore at the moment, Maybank KimEng cautions of various scenarios involving different levels of repatriation and their implications for the banking system.

"A large capital outflow may exert subtle pressure on the SGD, tighten system/banks’ liquidity and reduce wealth AUM (Assets Under Management)," the research firm said in a report

Maybank KimEng sees two categories where the effects of the outflows can be seen more quickly: 1) decline in private banking assets; and 2) customer deposit outflows.

Singapore banks do not disclose the amount of private banking assets from Indonesians. Early this year, DBS’s CEO Piyush Gupta estimated that 10- 15% of its private banking book is from Indonesia. As such, Maybank KimEng thinks OCBC is more exposed to Indonesian wealth as ING Asia Private Bank and Barclays wealth management business in Singapore and Hong Kong, which OCBC acquired, have a presence in Indonesia.

"In our scenario, we assumed 20% of OCBC’s AUM is from Indonesians as it is more exposed than peers and 15% of AUM for DBS and UOB given their smaller exposure," it said.

According to the research firm, if all Indonesian AUM gets repatriated, OCBC would see a larger decline in total income, at 1.6% vs peers’ 0.4-1.1%.

"The decline in 2017E total income and net profits across Singapore banks will be manageable, at less than 1-2%, ceteris paribus," noted Maybank KimEng.

Customers’ deposit outflow

Total system (DBU and ACU) deposit growth has moderated to +2.2% YoY vs +8.8% a year ago. Transactions in SGD are largely booked in DBU (Domestic Banking Unit) while transactions in foreign currencies are booked in ACU (Asian Currency Unit). As Indonesians’ deposits are also in USD, one should not ignore the impact of deposit outflow from ACU, said Maybank KimEng.

MAS provides a breakdown of non-residents’ DBU deposits as well as ACU customer deposits by region (Indonesia is subsumed under East Asia by MAS definition). As there is a limited data on how much of these deposits belong to Indonesians, the research firm builds in a scenario where it assumes i) 20%, ii) 30% and iii) 50% of these non-residents’ deposits are from Indonesians. If all funds get repatriated, Maybank KimEng estimates that ~SGD37-92b could potentially flow out of the system, of which ~SGD9-23b from DBU deposits and ~SGD28- 69b from ACU deposits. As such, it believes that system liquidity will tighten.

"We estimate that 2017E system LDR will increase from 94.8% to 97.8%, 99.4% and 102.7% if deposits flow out by ~SGD37b, ~SGD55b and ~SGD92b respectively, ceteris paribus.

According to Maybank KimEng, the magnitude of customer deposit outflow at SGD37-92b may not have a significant impact to create liquidity issues for the system. SGD37-92b forms around 3-8% of total system deposits, which currently stands at SGD1.1t.

As to whether this will raise cost of funding for Singapore banks, it thinks that SGD7-32b of potential deposit outflow may not be large enough to warrant a meaningful increase in cost of funding.

With the exception of UOB (UOB had ~71% of total customer deposits in Singapore, at SGD177b as of June 2016), Singapore banks do not disclose customer deposits by geography.

Based on Maybank KimEng's estimation, SGD7-32b outflow is ~1-6% of Singapore banks’ customer deposits in Singapore.

"Our view is that banks may reduce assets or find deposit growth to compensate for the outflow, assuming our estimates are correct. If there is a massive system deposit outflow, we do not rule out the possibility that banks may offer higher interest rates on deposits in order to compete more aggressively for the shrinking deposit base," said Maybank KimEng.