Soft interbank rates bode well for economy

A period of softer interbank rates is expected to be generally positive for the economy and lending; although for individual banks, the impact could be mixed.

Interbank rates - the rate at which banks lend to one another and to which most loans are pegged - have been volatile of late, with sharp falls seen in recent weeks to levels not seen since 2005.

The benchmark three-month Singapore Interbank Offered Rate (Sibor) fell to a low of 2.93 per cent in mid-March, and is currently hovering at just above 3 per cent.

With loans growth and domestic consumption still lagging the strong rate of economic expansion, analysts say, softer interbank rates may help to narrow the gap.

After no meaningful increase for a decade, loans growth is starting to pick up, and some now expect double-digit expansion this year on the back of the strong domestic economy and the revival in the property market.

Credit Suisse said in a recent research report that the fall in interbank rates is likely to benefit banks by boosting asset prices and increasing demand for loans.

Recent figures released by the Monetary Authority of Singapore (MAS) show that total loans amounted to $198.4 billion in February, up 7.9 per cent from a year ago. Manufacturing loans grew 4.7 per cent to $10.7 billion, while construction loans increased 18 per cent $27.6 billion. Housing loans grew 2.7 per cent to $63.8 billion.

Brandon Ng, bank analyst at Phillip Securities, said: ‘This decline seems beneficial to local banks in the near-term as time deposits will adjust accordingly and will ease some funding pressures, whereas floating loans usually take longer to re-price.’

For home loan borrowers, it also signals the end of a cycle of upward re-pricing, although rates are not expected to drop. While the interbank rate cycle had peaked at the end of last year, some home loan borrowers were still asked to pay higher interest rates because of the lag effect.

‘Further mortgage rate hikes now look less likely, but they will also be sticky downwards,’ said Citigroup bank analyst Robert Kong.

However, while lower interest rates are broadly welcomed, the net impact of a lower Sibor on each of the three Singapore banks is dependent on the size of their deposits relative to their loan books and the composition of their loan and investment portfolios.

In an analysis of the impact of a falling Sibor on the banks, Mr Kong said that DBS Bank is likely to be a loser, with OCBC Bank a relative winner.

‘The speed and severity of the fall could mean margin concerns for DBS in 2Q/3Q,’ he said.

DBS has the most rate-sensitive earnings of its peers because of factors such as a low Singapore loan-deposit ratio, a high level of interbank loans and a large amount of low-cost funds, as well as a high exposure to corporate loans which are Sibor sensitive, according to Mr Kong.

As three-month Sibor surged between Q3 2005 and Q1 2006, DBS enjoyed the largest boost (at a time when volume growth was weak), followed by United Overseas Bank (UOB), while OCBC suffered.

OCBC, however, has a high dependence on Sibor time deposits, which re-price more quickly than asset yields. Hence, it tends to benefit from a lower Sibor, while UOB lies somewhere in between.

One implication for bank customers is that deposit rates, which peaked in the later part of last year, will now soften.

Interbank rates are not expected to reverse their current trend in the near term, but could stabilise at around current levels.

‘As long as moderate appreciation of Singapore dollar according to MAS remains on track and no major movements in the interest rates within the $NEER (Sing-dollar nominal effective exchange rate), we should not see much adjustment in local interest rates,’ said Mr Ng.

Source: The Business Times, 05 April 2007