Singapore banks brace for liquidity woes as interest rates rise

Deposit outflows will continue next year.

The prospect of rising interest rates does not paint a pretty picture for liquidity in Singapore, especially coupled with the fact that local SGD deposit growth has been very weak for quite some time.

According to UBS, tight SGD liquidity will simply mean tighter SGD deposit competition for local banks. Though net interest margins are expanding, a rise in cost of funds due to high LDRs and late credit cycle dynamics can eat into the benefit from asset yield expansion.

“In our view, asset growth will continue to matter more for interest income for the Singapore banks next year. On the positive side, this could also mean better pricing for the loans pegged to the SOR if this is sustained. Most floating rate loans for the three banks however appear to be SIBOR based (which has not moved much),” noted UBS.

Here’s more from UBS:

Money supply growth (M1/M2) has remained close to zero in Singapore for a while. Local S$ deposit growth has been very weak. Coupled with a high loan-to-deposit (109%) this doesn’t paint a positive picture for liquidity in Singapore, something we have been worried about all this year.

While some of this move could of course be seasonal, the trend is probably more structural. Potential shifts in FX expectations (US$/SG$) and more attractive yields elsewhere (e.g. US) has led to S$ deposit outflows this year.

This outflow could likely continue into next year. New S$ liquidity coverage ratio (LCR) requirements for the banks starting Jan 2015 could be another reason. These pressures are likely to persist.