Singapore banks face tepid loan growth; interest margins to peak in 2023
Banks may face some backsliding in its bad loans ratio, S&P’s Ivan Tan warned.
Singapore banks may face backsliding in its bad loans ratio in 2023 as higher borrowing costs and inflation weigh on consumers and small businesses, reports S&P Global Ratings.
“The realities of higher borrowing costs, coupled with still-elevated inflation, will register more prominently in 2023. This could result in some backsliding after last year's further improvement in nonperforming loan (NPL) ratios,” S&P primary credit analyst Ivan Tan said in the ratings agency’s mid-year banking outlook report.
Consumers, and small and midsize enterprises (SMEs) typically bear the brunt of high input costs and interest rates.
Net interest margins (NIMs) of banks in Singapore have plateaued.
“We forecast interest margins will peak at 2%-2.2% as the tightening cycle fades and funding costs start catching up with asset yields,” Tan said.
In terms of loans, Singapore banks should expect low single-digital growth. S&P has book a loan growth of only 3% to 5% over the next 12 to 18 months, with credit costs returning to the pre-COVID range of 20 basis points (bps) to 25 bps.
A robust job market with very low unemployment, and strong financial buffers of corporations, should mitigate funding cost risks. Any asset-quality deterioration should be manageable, with the NPL ratio to remain below 2%, according to S&P.
Singapore’s recovering travel and tourism, and domestic-oriented sectors will also cushion the
slowdown in 2023.
“The Singapore government is highly supportive of the banking system. We believe it will provide timely financial support to ensure the stability of the financial system, if needed. This in turn supports the banks' financial profile,” Tan said.
Beyond 2023, capital management will continue to be a balancing act between prudence and efficiency.
“The former took precedence during COVID. The latter was more apparent in 2022 when banks reported record profits, which led to generous dividend payouts including special one-time payments,” Tan noted.
S&P believes that banks will continue to exercise good judgment in both capital and risk management, and tailor their decisions according to prevailing credit conditions.