Information about Asia and the Pacific Asia y el Pacífico
Journal Issue

Singapore: Selected Issues

International Monetary Fund
Published Date:
April 2005
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Information about Asia and the Pacific Asia y el Pacífico
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II. Outward Expansion of Singapore Banks1

A. Introduction

1. In recent years, the entry of foreign banks and the difficult post-Asian-crisis environment have challenged the traditionally profitable Singapore banks. Interest margins have declined and the limited size of the domestic market has become increasingly a constraint in the less buoyant post-crisis economy. These competitive pressures have led domestic banks to consolidate at home and expand abroad. While the consolidation has helped to reduce cost and increase profits, the results of the outward expansion have been mixed, with greater success in Hong Kong SAR and Malaysia, and relatively less in Thailand and the Philippines.

2. This chapter assesses the factors behind the mixed results of Singapore banks’ outward expansion by examining the region’s industry structure and competitive conditions. The objective is to provide a comparative view of the current state of bank competition in the region where Singaporean banks’ have expanded. The analysis shows that the performance abroad is largely determined by market conditions in those markets and the efficiency of the entering bank is a less critical factor.

B. Liberalization, Consolidation, and Outward Expansion

3. Until recently, foreign banks faced a number of restrictions on their access to the Singapore domestic banking market. Since 1999, the progressive removal of barriers to the local activities of foreign banks has largely levelled the playing field for foreign intermediaries and has increased contestability in the domestic banking system.

4. Currently, six foreign banks (Qualifying Foreign Banks) are licensed to operate up to 25 branches locally. In addition, MAS plans to gradually upgrade all offshore banks to “Wholesale Bank” status, allowing them to develop their own wholesale business, while the 40 percent foreign ownership limit for domestic banks has already been lifted.2

5. These reforms have led to an expansion in the market share of foreign banks to around 40 percent.3 The reforms have also increased competition especially in segments of the market where localized knowledge is needed less, such as, in mortgage lending. Partly in reaction to the increased competition domestic banks have consolidated at home. The number of domestic banks fell from 5 to 3 between 1999–2003, as larger banks acquired the smaller ones. The share of bank deposits controlled by the three largest banks was about 60 percent in 2003. The consolidation helped banks to use their larger scale to cut down the costs, which, along with the greater contestability, compressed intermediation margins. Net interest rate margins have been on a declining trend since the liberalization and are among the lowest in the region at 1.9 percent.

Interest Margins at Major Singapore’s Banks

Source: Fitch Research - BankScope

6. Singapore banks have also expanded abroad in response to the increased competition. Since 1999, Singaporean banks have expanded into Hong Kong SAR, Thailand, the Philippines, and Indonesia. The expansion into Malaysia occurred in 1994. In addition, Temasek, the government’s holding company and the lead share-holder of Singapore’s largest bank—DBS, has also been active acquiring shares in Indian, Malaysian, and Indonesian banks.

C. Competition and Profitability in Asian Banking System

7. Banking systems in the region are fairly heterogeneous. Market structure and competitive conditions vary widely as do efficiency, bank capitalization, NPL ratios, the role of state-owned banks, and the degree of openness to foreign entry. These differences often reflect the substantial differences in the state of economic development. In this section, the analysis focuses on two of these aspects: market structure and the role of state-owned and foreign banks.

8. In recent years, banking industries in many emerging markets have gone through a wave of mergers and acquisitions. This has resulted in reduced numbers of domestic banks and increased market concentration.4 In most Asian economies, this consolidation process has been the result of a policy-driven effort aimed at improving bank efficiency and at increasing financial stability. In some countries, such as Thailand and Indonesia, the consolidation has been a response to the Asian crisis; in others, such as in Singapore, it has been part of a strategic plan aimed at preparing domestic banks for foreign competition. Notwithstanding this process, bank concentration in the region has remained low by international standards, and in many banking systems a large number of small banks still coexist with three or four major players.5

Percapita income and the Market Share of Foreign Banks (2003)

9. The higher market concentration has not reduced competition. The empirical literature on bank competition finds mixed evidence on the relationship between market concentration and various measures of profitability, such as interest rate margins and returns on average assets (ROA).6 In Asia, the more concentrated markets have relatively lower interest rate margins. This counterintuitive outcome is the result of two factors. First, in most cases, bank consolidation has been accompanied by other financial sector reforms that have increased contestability by facilitating foreign competition and the entry of new institutions. Second, higher market concentration has led to more efficient banking systems, where larger banks have exploited economies of scale, superior risk management, and new technologies.

Market Concentration and Interest Rate Margin (2003)

10. State- and foreign-owned banks have played critical roles in the way the banking sector has developed in the region. In crisis countries, the restructuring of the banking system has often involved government bailouts and the recourse to foreign capital, resulting in large portions of the banking system under government or foreign control. In other countries, the presence of foreign-owned banks (Hong Kong SAR) or state-owned banks (Vietnam, India, and Taiwan Province of China) has been an historical phenomenon. That said, there are some empirical regularities associated with a large foreign or government presence in the banking system:

  • First, the state- and foreign-owned banks appear to be substitutes for each other. To some extent, this reflects the fact that state-owned banks are often sold to foreigners. However, it also results from banking systems with heavy government participation often limiting foreign ownership and thus being unattractive to foreign banks.
  • Second, the market share of state- and foreign-owned banks are correlated with system-wide efficiency and interest rate margins.7 A large government presence is associated with high interest margins and high cost-to-income ratios. A large foreign presence is often correlated with the opposite. These findings support the generally held view that state-owned banks are relatively less efficient and that foreign banks bring new discipline to emerging markets through better technology and superior risk-management. However, there is likely to be a simultaneity bias in this result to the extent that foreign banks are often attracted to markets that are more developed and typically characterized by more efficient institutions, as confirmed by the fact that the countries with a larger foreign presence are generally more developed.

Market Concentration and Cost-Income Ratio (2003)

Foreign-owned and State-Owned Banks

D. Singapore Bank’s Overseas Performance

11. So far, the regional expansion of Singapore’s banks has led to mixed results, with relatively successful operations in Hong Kong SAR and Malaysia, but less so in Thailand, Indonesia, and the Philippines. For example, in 2003, average returns on equity (ROE) in Hong Kong SAR and Malaysia were over 17 percent, while they were below 12 percent and about 9 percent in Thailand and the Philippines, respectively.8 Rather than a result of the relative efficiency of Singapore banks, this pattern is largely due to differences in market conditions across these countries.

  • Singapore’s banks have several comparative advantages on their side. They are among the most efficient in the region with the second lowest cost-income ratios. They have low nonperforming loans (NPLs), especially when compared to the Asian-crisis countries. They benefit from a well established reputation built on the back of a superior regulatory framework, and they are located in a major international financial center.
  • Despite these relative advantages, their performance in the regional markets appears to be largely influenced by local market conditions. Cross-sectional evidence from a large set of countries suggests that in any given year, between a third and a half of the variance of foreign banks’ net interest margins is explained by the variance in the average net interest margins of domestic banks in the host country in which they operate. This helps to explain why the foreign subsidiaries of Singapore banks have done well in markets where local banks have been successful such as in Hong Kong SAR and Malaysia, and have performed less well in countries such as Indonesia and the Philippines, where domestic banks have also performed relatively poorly.

Selected Banking Indicators

(2003 data, in percent of regional average)

Sources: Fitch Research, Bankscope, Capital Intelligence

Interest Margin in Selected World Markets

(2000-2002 average)

Interest Margin in Selected Asian Markets

(2000-2002 average)

Source: Bankscope

E. Conclusions

12. Singapore banks have started expanding abroad in response to increasing foreign competition at home. The results of this strategy have been so far mixed, largely reflecting differences in competitive conditions across host markets. That said, the strategic location, higher efficiency, low nonperforming loans (NPLs), well established reputation, and superior home-country regulatory framework of Singapore banks will help them face the competitive challenges that will emerge as banking sectors in the region continue to liberalize.9

13. The increasing expansion abroad may also pose new challenges for bank regulators. The growing presence of foreign banks raises new supervisory issues—the objectives of the parent bank and the local institution may differ and local regulators may lack important information about the parent bank’s financial stability.10 The expansion of local banks into foreign countries with different market, legal, and regulatory infrastructure also brings new risks—problems in their foreign ventures may threaten the stability of the parent banks. The MAS is well aware of these risks and has been actively seeking cooperation with bank regulators in countries hosting Singapore’s banks subsidiaries and in the home countries of the major foreign banks active in Singapore.


    AbiadA. and A.Mody(2003)Financial Reform: What Shakes It? What Shapes It?,IMF Working Paper No. 03/70.

    BergerA.A.Demirguc-KuntR.Levine and J.Haubrich(2004)Bank Concentration and Competition: An Evolution in the Making,Journal of Money Banking and CreditNo. 3.

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    ClaessensS. and L.Laeven(2004)What Drives Bank Competition? Some International Evidence,Journal of Money Banking and CreditNo. 3.

    Martinez-PeriaM. and A.Mody(2004)How Foreign Participation and Market Concentration Impact Bank Spreads: Evidence from Latin America,Journal of Money Banking and CreditNo. 3.

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    SongI.(2004)Foreign Bank Supervision and Challenges to Emerging Market Supervisors,IMF Working Paper No. 04/82.

1Prepared by Giovanni Dell’Ariccia (38135).
2However, the new regulation requires that the Articles of Association are amended to include the appointment of a Nominating Committee, which has to be approved by MAS. This committee oversees the appointment of directors and key managers. Its stated aim is to prevent groups of foreign investors to act in a manner inconsistent with national interest (see “Singapore–Country Banking Report” by Capital Intelligence).
3Source: Capital Intelligence, based on non-bank resident deposits.
4See Berger et al. (2004).
5In most countries in the region the market share of the five largest banks is below the world-wide median according to the World Bank Dataset on Regulation and Supervision.
6See Berger et al. (2004) for a review.
7This is consistent with the findings of Martinez-Peria and Mody (2004) for a group for banking systems in Latin America, and those of Claessens and Laeven (2004) for a larger sample of countries.
8Sources: Fitch Ratings and Capital Intelligence.
9Abiad and Mody (2003).
10A comprehensive review of the regulatory challenges associated with cross-border banking integration is in Song (2004).

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