Singapore banks face double threat

Strong loan growth fails to shore up net interest margin
Since the global economic recovery in 2009, the strong double‐digit loan growth enjoyed by the three Singapore banks has only resulted in a modest increase in net interest income. The main reason was the decline in NIM. UOB, which had the largest NIM to begin with, bore the brunt of the impact. The banks have now cautioned that loan expansion would moderate in 2H11, possibly growing in the mid‐teens. However, we think this target could be at risk in the event of a global economic slowdown. Even assuming a more moderate loan growth of 10% over the next 12 months, net interest income would still decline.

Recession headwinds lurk
Most economists now agree that even if the US succeeds in avoiding a recession, global growth would remain low going forward. This will inevitably affect corporate loan demand for export‐oriented economies like Singapore, which has a chance of entering a technical recession this quarter. Singapore banks currently derive about 50‐65% of their profits domestically, even as they diversify their income geographically. But at home, there is political pressure to cool the property market, which implies that demand for mortgage loans will continue to slow down. Moreover, other income such as fees from loans and investment banking would also be directly affected in such a scenario.