Interest rates will be Singapore banks’ boon and bane through 2023: analyst

It’ll benefit them over the next three quarters, but asset quality may deteriorate after.

The rising interest rates will both benefit and challenge Singapore's big three banks through 2023. Whilst their banner profits are expected to continue over the next two or three quarters, profitability is also expected to come under doldrums later in 2023, with high interest rates coming to bite their asset quality, warns Moody’s Investors Service.

DBS, OCBC, and UOB all reported record profit for the third quarter of 2022 thanks to  boosts in their interest income from rising interest rates. Net profit at UOB and DBS surged 26% and 23%, respectively, whilst OCBC’s net profits rose by 8% if only due to a decline in insurance income that offset growth in banking profit.

The three banks’ profitability are expected to come under pressure later in 2023, with Moody’s saying that they are likely to add on their loan-loss provisions in anticipation of a deterioration in asset quality caused by higher rates. This will also cause loan growth to moderate.

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“The pace of gains in three banks' profitability will slow in 2023 as their loan- loss provisions and funding costs increase,” Moody’s Investors Service said in a report, adding that it expects the three banks’ returns on assets to rise about 0.1% percentage points to 1.2%-1.3% in 2023 from current levels

Weak financial markets will continue to depress fee income.

“The banks' asset quality will deteriorate moderately in 2023 as rising interest rates amidst high inflation hurts economic growth and leads to increases in defaults by borrowers, with loans to small and medium-sized enterprises and unsecured retail loans at greater risk,” Moody’s warned.

Furthermore, stress amongst property developers in China will contribute to increases in the three Singaporean banks' problem loans because they have exposures to the sector, the ratings agency added.

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On the upside, the three banks are not expected to suffer from any liquidity and funding issues. 

“The ratios of current and savings deposits in the three banks' total deposits remained high despite a continued shift among depositors to higher-rate term deposits. We expect their funding and liquidity to remain robust in 2023,” the report concluded.