Banking sector lending in Singapore enjoyed a 12-year year-on-year growth of 29.7% during August, but the rising cost of Singapore dollar to US dollar swaps could slow further loan expansion from now to the end of the year, believes Nomura.
“[US dollar] loan books…are seeing both volume and margin pressure due to rising cost of sourcing [US dollar] funding,” said analyst Anand Pathmakanthan in a report dated October 10. “DBS and OCBC, with [US dollar] lending making up 29% and 24% of their respective loan books and with [US dollar loan to deposit ratios] of 146% and 156% respectively, are most at risk.”
Pathmakanthan notes that rising Singapore dollar to US dollar swap costs means that low-margin US dollar trade financing may no longer be profitable, implying a sharp deceleration over the second half.
Additionally, the dependence of DBS and OCBC on short-term swap lines leaves the banks open to a margin squeeze if the assets they fund are of longer duration. Nomura says that all Singapore banks will face a net interest margin downside from this.
Nomura considers UOB to the best insulated of the Singapore banks to foreign exchange swap changes. It notes that US dollar lending accounts for only 13% of UOB’s loan book, it has a US dollar loan to deposit ratio of around 100%, and it possesses the least capital markets exposure.
Despite these potential headwinds, the report notes that the heady growth that Singapore banks have so far experienced. Business lending—which includes property sector-related building and construction—is continuing to accelerate at a rate of almost 40% year-on-year, despite softening mortgage growth.