Bank loans

Singapore bank lending to rise as Southeast Asia reopens after pandemic

Singapore has opened its borders to fully vaccinated visitors.
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Singaporean banks are expected to see faster loan growth and better profitability as Southeast Asian economies open up for business and travel after two years.

Loans in the three Singaporean banks – DBS Group Holdings Ltd., Oversea-Chinese Banking Corp. ltd. or OCBC, and United Overseas Bank Ltd. — rose 8% to 9% year-over-year in the first quarter of 2022, according to their recently announced results. This is a significant improvement from 5% loan growth each reported by DBS and UOB in the first quarter of 2021, while OCBC loans were flat.caused by the COVID-19 pandemic.

DBS expects mid-single-digit loan growth this year, and UOB expects mid-to-high single-digit growth.

Lending is expected to increase as Southeast Asian economies open their borders, increase infrastructure spending and expand productive capacity, said Thilan Wickramasinghe, head of research and head of regional finance at Maybank Kim. Eng Singapore. “This should increase the demand for loans,” Wickramasinghe said.

The three Singaporean banks are heavily focused on Southeast Asia and derive most of their revenue from the region. In 2021, DBS generated around 70% of its operating profit in Singapore and South and Southeast Asia, according to data from S&P Global Market Intelligence. OCBC and UOB derive about 80% of their operating revenue from the city-state and Southeast Asia.

Regional model

A surge in loan demand, according to Wickramasinghe, “bodes well for Singaporean banks that have invested in integrated regional models that could leverage cross-border demand for credit and banking services. »

Singapore itself has fully reopened its borders to all vaccinated visitors from April 1. The government expects the city-state’s economy to grow 3% to 5% in 2022, following a 7.6% expansion in 2021, according to the Ministry of Commerce and Industry. The Monetary Authority of Singapore tightened policy ahead of many global peers and put the local dollar on a steeper appreciation path against a basket of currencies from the country’s major trading partners. With most global central banks, including the US Federal Reserve, raising rates to curb inflation, the outlook for banks could improve.

Loan growth should support bank earnings alongside the effect of higher net interest margins a key indicator of bank profitability which have been helped by rising interest rates. The NIMs of the three banks rose 2 to 3 basis points quarter over quarter, indicating a recovery after falling for three years amid the pandemic-induced slowdown.

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Prudent Provisions

Singapore banks have largely maintained provisions to ride out market uncertainties and protect against a rise in bad loans, according to their first-quarter results.

“Provisioning levels for banks are conservative with provisioning coverage close to 100%, or 1x, on non-performing assets,” said Michael Wu, senior equity analyst at Morningstar. “Despite expectations of slower growth, overall economic conditions are still expected to [improve] that supports asset quality.”

In addition, banks maintained their “management overlay”, an additional amount agreed by banks to supplement central bank provisioning requirements.

“While risks of downside revisions to credit cost forecasts remain, large management overlay buffers reduce the likelihood of material earnings downgrades,” according to a May 3 note from CGS-CIMB.

As of May 11, US$1 equaled S$1.39.