DBS and Friends Need More Than Rising Interest Margins

Singapore banks won't rebound unless the mortgage market does.

DBS Group's anemic interest margins are finally gaining some muscle mass. But higher profitability alone is unlikely to lure equity investors, at least not until discouraged home buyers return to the city-state's slumping mortgage market.

The island's biggest lender by assets reported a 6 percent increase in third-quarter profit today, helped by a net interest margin that was the highest in four years. Yet the stock slipped and has declined 16 percent this year. OCBC and UOB, Singapore's two other home-grown banks, also beat earnings expectations only to elicit a similar meh. Their shares too have underperformed the benchmark Straits Times Index's 12 percent drop since Dec. 31.

With commodity markets in turmoil, it's hardly a surprise that business lending in Singapore has been a washout this year, growing just 0.4 percent from the same period of 2014. That's not the whole picture, though. Lackluster mortgage demand is also damping advances, with housing loans, which account for 30 percent of total bank credit, increasing less than 5 percent from a year earlier in September, the weakest pace of expansion in more than eight years.

The slowdown is largely a result of tighter government policy. To prevent the property market from being inundated by cheap global money, authorities have progressively raised taxes on buyers, directed banks to lower their loan-to-value ceilings, and generally made it harder for them to extend credit to over-leveraged households.

As a result, residential property prices have fallen about 8 percent over the past two years, following a jump of about 50 percent in the preceding four. Home prices could slide further as borrowing costs rise. After holding below 0.5 percent for more than five years, the city's benchmark interbank lending rate has shot up to a little over 1.07 percent.

True, Singapore's banks will earn juicier margins as interest rates on existing variable-rate mortgages adjust higher. But they may also have to make larger provisions for soured debt. Over the past 12 months, the trio have set aside some S$1.7 billion ($1.2 billion) combined to cushion for loan losses, a rise of 23 percent from the previous corresponding period.

As Singapore's economy flirts with a technical recession, authorities may have little choice except to open the property door wider for buyers. Until that time, the island's banks will struggle to impress.


This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Andy Mukherjee in Singapore at amukherjee@bloomberg.net

    To contact the editor responsible for this story:
    Katrina Nicholas at knicholas2@bloomberg.net

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