Singapore banks fare better than Indonesian lenders amidst rate hikes

Every 25bp hike that re-prices loan book translates into an earnings boost.

Tightening monetary policy by the Fed is poised to give a boost to banks in Singapore as loans re-price ahead of deposits and around 70-90% of lending portfolios are variable-rate loans, according to DBS Bank Research.

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The currency policies of Singapore, like Hong Kong, are usually in lockstep with the Fed, explaining why the interbank rate has risen by 95bps since July 2017.

“Whilst deposit rates have risen by more than 20bps in 1HCY18 from the more intense deposit competition among Singapore banks, this was offset by c.20-30bps higher loan yields,” DBS Bank Research said in a note.

Every 25bp increase in interest rates that re-prices the SGD, HKD, and USD loan book is expected to translate into a c.3-bp improvement in net interest margin (NIM), a common measure of banking profitability and a 2% accretion to bank. Additionally, loan growth is unlikely to be hit by higher interest rates as the tightening policies have been gradual and expected.

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However, the positive earnings impact to the city state's banks brought about by higher interest rates will lag by three to six months, explained DBS.  

The city state’s well-capitalised lenders along with Philippine banks are set to benefit the most in ASEAn from higher interest rates, added DBS. Indonesian banks stand to lose the most as deposit rates tend to rise first ahead of loans and rate hikes would likely bring about weaker NIMs in the short-term. In fact, DBS estimates that every 25-bp increase in interest rates would reduce Indonesian bank earnings and NIMs by 2% and 5bps, on average.