Banks’ Hopes Of Repricing Loan Rates Dissipate

Source : The Business Times, Friday, October 12, 2007

THE Monetary Authority of Singapore’s decision to raise the pace of the Singapore dollar appreciation is good news for home buyers, consumers and corporate borrowers as it should lead to higher money inflows and keep interest rates down.

For bankers though, it was practically the death knell to hopes for repricing loan interest rates upwards. For a while it had looked like borrowers were facing the prospect of interest rate hikes given the credit market squeeze in July and August. After hitting a year low of 2.25 per cent in early May, the key wholesale three-month interbank rate began climbing and hit 2.8125 per cent on Sept 5.

Bankers were anticipating repricing interest rates higher on loans as risks were said to have risen given the volatility of the financial markets and the increased chance of a recession in the United States.

But since then the rate has fallen steadily to around 2.4 per cent as offshore money has flowed here in anticipation of a strengthening Singapore dollar, with the stock market hitting all-time highs.

The local unit rose to a 10-year high against the US dollar on Wednesday after the MAS said it will increase slightly the pace of annual appreciation for the trade-weighted Singapore dollar in its semi-annual monetary policy statement in a strategy to curb inflation.

The stronger Sing dollar will attract inflows and the higher liquidity will determine the local interest rates, said Ho Woei Chen, an analyst with United Overseas Bank. ‘This will lead cost of borrowing lower,’ said Ms Ho.

A stronger Sing dollar will make people want to invest in local equity markets as they will get both capital and asset returns, she said.

One local banker said all hopes of repricing risks and therefore of interest rates going upwards are practically gone. But interest rates are still unlikely to move lower unless the wholesale rates drop to 1.5 per cent.

The key to watch will be interbank rates, which seemed to have softened recently but not collapsed, suggesting that MAS may be intervening and sterilising this, said Tay Chin Seng, Macquarie Securities analyst. Mr Tay said unless the interbank rate goes into a prolonged decline below 2 per cent, he is not expecting the banks to take lending rates down or suffer significantly from lower yields.

UOB’s house view is that the three-month interbank rate will average around 2.5 per cent until the end of 2008.

Double-digit growth

While the local banks will find it harder going forward to raise margins on loans, they will continue to enjoy double-digit lending growth with the economy going gangbusters. The local economy grew 9.4 per cent in the third quarter and practically everyone believes it will end the year higher than the government forecast of 7-8 per cent.

Latest data show that loans to non-bank clients grew 10.8 per cent in August - the third in a row above 10 per cent. But there is some uncertainty on how the local banks’ earnings will be impacted by their collateralised debt obligations or CDO exposure and the fall in treasury-related income. UBS has cut its 2007 earnings estimates for DBS by 11 per cent.

Morgan Stanley said DBS is most exposed to the negative effects of falling interbank rates, given its structurally low deposit costs and vast Sing dollar excess liquidity (S$ loan/deposit ratio is 50 per cent).

Morgan Stanley also said while the Singapore banks may confront realised/unrealised losses on security positions in 2H ‘07 from woes in August 2007, these appear manageable. The more worrying uncertainty is the future revenue flows from sustained subdued investment market activity.

What the three local banks - DBS, UOB and OCBC - need to do is to redouble their wealth management efforts to sell more investment products and earn fees. They have the largest branch networks and are in a good position to persuade especially affluent customers to switch out of their deposits to investment products.

But it is a very competitive segment which is dominated by the foreign banks which have much longer experience selling to such customers with their broader range of products.

Still local banks are trying. DBS has opened six Treasures centres, serving customers with at least $200,000 in investible assets. UOB too has ramped up its privilege banking centres to six from just two a year ago.

The local banks have never been very good in taking the opportunity to make money when deposits growth is strong. Still there’s no time like the present.