Andy Mukherjee is a Bloomberg Gadfly columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.

Eight years ago, tiny Singapore was Asia's giant piggy bank. The city's lenders collected S$165 billion ($122 billion) every month from thrifty emerging economies in the region, sent about 60 percent of it to the rest of the world, and squirreled away the rest.

Then came the collapse of Lehman Brothers, deleveraging in the U.S. and Europe, and a massive surge in Chinese credit demand. Now it was the emerging Asian economies, led by the People's Republic, that were borrowing more than S$200 billion from Singapore's lenders every month. And while there was still more money coming in than going out, the rate of accumulation was less than half what it used to be. The piggy bank had cracks.  

Thanks to that rupture, the foreign-currency loans-to-deposit ratio of Singapore's banking system zoomed from 76 percent in 2007 to nearly 126 percent in September last year, a level that according to the city-state's monetary authority warrants ``close monitoring."

Things aren't as tight for the three local Singapore banks. But even for them, loans last year totaled 87 percent of deposits, versus 68 percent in 2007 and 82 percent in 2010. Liquidity isn't as abundant as it once was, and that -- together with rising bad-loan provisioning costs because of exposure to China and the oil and gas industry -- could slow Singaporean lenders' profit growth.

Shrinking Headroom
Loan-to-deposit ratios of homegrown Singapore banks
Source: Bloomberg

Now that lending margins have started to improve, the motivation for making newer, more profitable loans is strong. After all, each dollar of Oversea-Chinese Banking Corp.'s assets earns only 1.2 cents in operating revenue before provisions, compared with 1.6 cents for Hang Seng Bank in Hong Kong. 

Capital isn't a constraint: The average Tier 1 capital ratio at OCBC, DBS and United Overseas Bank was a healthy 14 percent at the end of last year.  

Strong Capital Buffer
Singapore banks' Tier 1 capital ratio
Source: Bloomberg

The narrow wiggle room for liquidity calls for caution. Hang Seng Bank's loan-to-deposit ratio is less than 72 percent, by Bloomberg's calculations, and 85 percent for OCBC. It's hard to see Singapore lenders aggressively expanding their loan books if deposit growth doesn't keep pace. But as Bloomberg Intelligence analyst Diksha Gera noted recently, HSBC and Malaysia's Maybank are joining Citigroup and Standard Chartered in locally incorporating their Singapore retail banks. Growing competition for deposits at home could whittle away margins. 

Investors are naturally nervous ahead of Singapore banks' quarterly earnings later this month. The shares of DBS, OCBC and UOB are trading below analysts' estimates of their 2017 book values. Among the three biggest lenders traded in Hong Kong, only Bank of East Asia is getting discounted so heavily. Fears about asset quality are the dominant short-term concern. But for the fortunes of Singapore lenders to turn decisively, cracks in the piggy bank will also need to be plugged, and that could take time.

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

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Katrina Nicholas at