Singapore banks' net interest margins dropped 42bp vs 2009 peak

Blame it on local competition.

According to Moody's latest report on Singapore banks, profitability remains robust for Singapore banks relative to regional peers.

Return on average assets was 1.08% and return on average RWA was 2.03% in 2012. While we anticipate a marginal fall from these levels in the near run, Singapore banks will face increasing challenges as rates rise further and market volatility increases.

Competition within Singapore has led to a 42-basis-point decline in NIMs since peaking in 2009 according to banks’ reported data.

Here's more from Moody's:

We expect industry NIM to decline further in 2013, though the magnitude of a decline could be mitigated if rates turn upwards. Nevertheless, we see continued downward pressure on margins from the low interest rate environment and keen competition for loans, as well as competition for customer deposits.

In addition, we expect weaker asset quality to increase incremental credit costs, particularly after credit costs dipped to 0.21% of gross loans in 2012. Credit costs should revert towards 0.33% of gross loans (the average for 2000-2012), with the magnitude of cost increases tied to the pressure of higher rates on borrowers.

Net fee income for Singapore banks has grown by a CAGR of 11.4% from 2009 to 2012, outpacing growth in net interest income and partially off-setting margin compression.

However, as the majority of fees are tied to loans and wealth management products, we expect fee growth to dampen as a result of lower loan growth and a shift to more conservative investments (with lower fees).