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Singapore bank profits to peak in 2023, but high rates will dampen lending

Margins will peak mid-year, but loan demand is falling.

Singapore banks’ profits are expected to peak mid-year as they continue to benefit from fatter margins— but headwinds are catching up, and the high will begin to fizzle out the longer the high interest rate environment stays.

"Overall, we believe profitability will remain good for Singapore banks in 2023," said S&P Global Ratings credit analyst Ivan Tan. "But margins will peak, and tepid loan growth will crimp further upside."

"The realities of higher borrowing costs, coupled with still elevated inflation, will register more prominently in 2023," he warned.

Higher funding costs and lower loan appetite will weigh on banks, the ratings agency reported.

“Funding costs are starting to catch up. Depositors have been shifting into higher-yielding fixed deposits, and the proportion of low-cost current and savings account deposits has steadily declined over consecutive quarters,” Tan noted.

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Borrowing appetite is expected to moderate in 2023, with S&P forecasting loan growth in low-mid single digits in 2023.

“Systemwide gross loans for Singapore commercial banks have declined for three consecutive months since September 2022. This coincided with a spike in lending yields, which will continue to weigh on consumers and businesses this year,” S&P said.

Property cooling measures will also hit on loan growth.

Taking Advantage
On the upside, Singapore banks are well-positioned to take advantage of tightening cycles, the ratings agency said.

“The majority of their floating rate loans have quickly repriced upward, while their balance sheets remain flushed with liquidity and low-cost customer deposits.

Banks’ net interest margins (NIMs) are expected to peak in 2023 after three consecutive quarters of rising asset yields in the past year.

Policy rates are in an upward trend not just in Singapore but also in major markets where local banks operate, except in China.

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However, the upside on interest margins will likely start tapering and peak in the middle of 2023, S&P said. 

Banks’ non-performing loans (NPL) ratios for banks could weaken slightly over the next 12-18 months. 

Singapore lenders also have exposure in Indonesia and Thailand, where the level of restructured loans remains elevated post COVID, the ratings agency warned.

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