Assessing Banking Sector Performance1
A. Banking Sector Trends
1. The financial cycle is firming after a prolonged moderation. Credit expanded mildlyin 2016 with both lending to residents and nonresident picking up (Figure 1). The pullback in trade financing since mid-2014 reflected unwinding of RMB carry-trades as the interest differential between the Chinese Renminbi (RMB) and the U.S. dollar narrowed and the Renminbi came under depreciation pressure. Overall lending activity firmed further in 2017:Q1, underpinned by domestic demand for credit, including in the interbank market, and the trade-related sectors. Additionally, a recovery in regional trade and an acceleration in growth momentum in the Eurozone helped support non-bank cross-border lending.
Figure 1.Singapore: Banking System Trends
2. The banking sector remains healthy, backed by high capital, liquidity, provisioning and profitability ratios, and still-low NPLs. Sector-wide non-performing loans (NPLs) have increased slightly (to 2 percent in 2017:Q1), due largely to stresses in the Oil and Gas (O&G) services sector. Banks have responded by increasing provisions (using forward-looking measures of impairment) and restructuring their loans. This resulted in a slight decline in profitability in 2016, which remained comfortably high. Household NPLs are expected to remain low, aided by past macroprudential policy measures, containing banks’ possibly losses on their credit portfolios.
3. Overall, the banking sector is well-positioned to withstand shocks. Capital and liquidity positions are sufficiently strong and well above regulatory requirements. The results of the Monetary Authority of Singapore (MAS) annual industry-wide stress test (IWST) confirmed that the banking system is able to withstand severe shocks including a protracted slowdown in China; slowdowns in the Eurozone and Japan, with significant negative spillovers to emerging Asia; and corporate defaults by the banks’ largest SMEs and O&G borrowers. Under these scenarios, all banks stay solvent, with their capital adequacy ratios (CARs) remaining above Basel regulatory requirements, despite higher NPL and write-downs.
4. Capital and liquidity positions of the local banking groups remain strong. Liquidity coverage ratios (LCR) of all three major banks remained high and rose in 2016:Q4, remaining well above the regulatory limits (Figure 2).2 Despite a slight increase in NPLs associated with the O&G sector (which nevertheless remained below the average for the banking sector), capital positions too remained strong, reflected in CARs well above the MAS’ regulatory requirement of 10 percent.3 Higher provisions associated with the increase in NPLs as well as compressed net interest margins weighed on banks’ profitability in 2016. While new NPL formation and further increases in provisions are expected to continue, recovering oil prices and freight rates should cap the pace of NPL formation.
Figure 2.Singapore’s Local Banking Groups: Trends
5. Looking ahead, banks’ profitability should benefit from the expected widening of net interest margins and firming of global growth and commodity prices. Reflecting the downturn in the O&G sector, local banks’ profitability declined in 2016, underperforming their regional peers, but improved in 2017:Q1. Additionally, local banks’ price-to-book ratios continue to fall behind the regional benchmark MSCI AXJ Financials index and that for regional peers. However, going forward, local banks could see some turnaround in profitability due to following factors:
The expected rise of US interest rates could steepen Singapore’s yield curve which should support banks’ interest income despite its potential adverse impact on credit quality.
Lending appears to be gaining traction, supported by a renewed appetite for loans by China and the Euro area (as economic activity there gathers pace) and domestic demand for loans (reflecting higher demand in the trade-related sectors).
The O&G and shipping sectors are expected to bottom out, as commodity prices and regional trade activity recover.
Nonetheless, lingering uncertainties surrounding US trade policies and Brexit, and risks of a disorderly deleveraging in China could weigh on the outlook for the banking sector.
B. The Wealth Management Sector
6. The turnaround in bank’s profitability (especially the strong performance in 2017:Q1) is attributed to two factors: an acceleration in credit growth and increases in fee income from wealth management services. The latter has contributed to 15-30 percent of domestic banks’ income. Strong performance of global and regional equities in recent years (particularly in the aftermath of the US elections) provided the wealth management segment a boost, spurring higher sales of unit trusts and other investment products. In 2015, Singapore’s assets under management (AUM) grew by 9 percent, compared to 1 percent globally.4 While official figures are not available for 2016, the strong trend increase in AUM in Singapore seems to have continued in 2016.
7. Local banks have been a key factor behind the wealth management sector’s growth and its main beneficiary. The AUM of domestic banks grew strongly in 2016, including due to acquisitions of existing operations, while that of large international banks in Singapore grew either more modestly or declined. In November 2016, OCBC acquired Barclay’s private banking business in Singapore and Hong Kong SAR.5 In addition, DBS acquired ANZ’s wealth management and retail banking business in five markets (including Singapore and Hong Kong SAR) in October 2016. Finally, OCBC announced plans to buy National Australia Bank’s private wealth business in Singapore and Hong Kong SAR in 2017.
8. According to MAS’ 2015 survey of fund managers, the largest share of AUM originated from Asia Pacific (56 percent), following by North America (18 percent), and Europe (17 percent). The destination of the majority of AUM too was Asia, having attracted 68 percent of the funds. This was followed by Europe (13 percent) and North America (12 percent). Most of the funds under management are invested in equities (43 percent), followed by bonds), alternative investments (20 percent), and collective investment vehicles (10 percent). This distribution remained largely unchanged compared to 2014, with a slight decline in the share of equity in favor of fixed income securities in 2015.
9. With the Asia and Pacific region projected to grow at healthy rates in the medium term, the prospects for the wealth management sector in Singapore remain strong. Given the role of the Singaporean banks in the region, the latter are well-placed to capitalize on the growing middle class and the growing demand for wealth management products. Several foreign wealth managers have retreated or are in the process of pulling back from Asian markets, creating opportunities for local banks to expand. In addition, the recent introduction of online asset management platforms (robo-advisers) in Singapore, including for mass-market investors, is expected to further stimulate the sector’s growth by broadening the base and providing more opportunities for banks to earn revenue.
10. However, risks remain and regulatory vigilance is required. As the sector continues to grow, reputational and operational risks are likely to increase, including due to potential AML/CFT and interconnectedness concerns. Wealth management and conventional banking operations within the same banking groups should be conducted at arms lengths to reduce risks. In addition, banks and fund managers should steer customers into investment products that are appropriate for their risk tolerance to reduce the potential adverse implications of shocks on investors.
Prepared by David Grigorian (APD) and Adeline Yeo (Resident Representative Office).
The minimum all-currency LCR requirement is set at 80 percent as of January 1, 2017, 90 percent for January 1, 2018, and 100 percent for January 1, 2019. The Singapore Dollar LCR should be at least 100 percent.
The rise in NPLs was primarily due to prolonged weakness in the O&G and shipping sectors, due largely to the decline in oil prices and freight rates.
“2015 Singapore Assets Management Survey: Singapore—Global City, World of Opportunities,” Monetary Authority of Singapore, 2015.
This acquisition helped OCBC’s private banking unit—Bank of Singapore—rise four places to rank seventh among Asia’s 20 largest private banks in terms of AUM. DBS was ranked sixth, unchanged from a year earlier. UOB was ranked 14th.