Margins wane for banks in south-east Asia as US interest rate cuts loom
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Banks in the 10-member Association of Southeast Asian Nations may be seeing the last of beefy earnings from loans in the current higher financing era as lower interest rates loom.
The US Federal Reserve has signalled rate cuts in the coming months on lower inflation worries, gradually making money cheaper to borrow. For the Asean’s biggest banks, most of which are based in Singapore, growth in income from loans could slow over the coming months.
“It is inevitable that this environment will change,” said Kavan Choksi, wealth consultant at corporate advisory KC Consulting. “It is imperative for banks to redirect their focus towards devising strategies to sustain growth amid evolving interest rate environments.”
The three major Singaporean financial institutions — DBS, United Overseas Bank and Oversea-Chinese Banking Corporation — refer to Fed rates when setting those for their own loans. Expectations are that growth in interest profits may have peaked.
OCBC on Wednesday said net interest margins — the difference between what a bank earns from loans and what it has to pay depositors, relative to interest-earning assets — should range from 2.2 per cent to 2.25 per cent in 2024, lower than the 2.29 per cent logged in the fourth quarter of last year.
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The bank booked a net profit of S$1.6bn (US$1.2bn) for the October-December quarter, up 12 per cent from the same period in 2022, even as the lender expects “low single-digit loan growth” in 2024.
“We expect 2024 to be a more challenging year than 2023,” said OCBC chief Helen Wong during Wednesday’s earnings briefing. “Would there be upside? It depends also on how interest rate environment will actually exhibit in the rest of the year.”
OCBC peer UOB noted in its latest earnings release that interest margins had peaked. Last week, the lender said net interest margins stood at 2.02 per cent in October-December — the lowest of all the quarters in 2023. The margin last year hit 2.14 per cent in January-March, with results steadily declining over consecutive quarters.
“It’s very clear on a declining interest rate environment . . . the ability to manage costs of deposits will be more important than the ability to manage yield,” said Lee Wai Fai, UOB’s chief financial officer, during an earnings briefing last week. “The challenge we have is to sustain the NIM . . . we have to manage aggressively our deposit base.”
To stay competitive, Singapore’s banks have raised interest payouts to depositors in the current era of higher financing costs. But the same costs would have deterred some customers from increasing or obtaining new leverage, putting lenders in a position where profitability from loans compresses.
Carmen Lee, an analyst at OCBC’s investment research unit, wrote in a report this month that slower growth in loans and unexpected deceleration in macroenvironment conditions in UOB’s key Asean markets were risks for the bank.
“Net interest margins improved from 1.86 per cent in financial year ‘22 to 2.09 per cent in financial year ‘23,” she wrote of the previous uptick, while noting the less positive prospects ahead. “[UOB] management is guiding for NIM of around 2 per cent in financial year ‘24.”
Elsewhere in Asean, Thai and Indonesian lenders also grapple with pressure on earnings. Credit research agency CreditSights noted in a January report on Thailand’s lenders, including Krung Thai Bank, TMB Thanachart Bank and Bangkok Bank, that “quarterly NIMs near or has peaked”.
“Loan growth saw yet another weak quarter [from October to December] due to a common focus on quality given elevated household debt and challenged small and medium enterprises, amid a still sluggish and uneven economic recovery,” the report said. “The banks remain cautious for financial year ‘24.”
In Indonesia, CreditSights noted in February that lenders Bank Mandiri and Bank Negara Indonesia “delivered a strong performance” last year, though both faced more NIM pressure.
“Funding costs rose again in quarter four so both banks saw quarter-on-quarter NIM compression,” the report said. “Both banks have guided for overall flat to slightly lower financial year ‘24 NIMs.”
DBS, south-east Asia’s largest bank by total assets, this month reported that NIM in October-December stood at 2.13 per cent, just a whisker above the 2.12 per cent recorded in January-March and the second-lowest figure last year. Peak performance in 2023 was logged in July-September when NIM was booked at 2.19 per cent.
“We took a conscious decision to put on some fixed-rate assets in the tail end of the third quarter and fourth quarter,” said DBS chief Piyush Gupta during an earnings call this month. “We put on about S$30bn in that period of time just to lock in rates to protect us from a declining interest rate environment.”
A report from the equity research unit of Jefferies this month noted a deteriorating global macroeconomic outlook as a risk to DBS, which could limit any upside to capital returns for the bank, after the lender published its earnings results.
“[The] company does not see stress in the book right now,” the report noted. “We see rather limited upside . . . with costs running slightly higher and . . . NIM marginally softer.”
But there may still be some time left for banks such as DBS to make the most out of high financing costs, with the Fed signalling a cautious approach to any rate cuts in the future.
In a report this month, the global research unit of HSBC highlighted that for the US central bank, the “timing of any move to cut policy rates may still depend significantly on inflation readings to come in the months ahead”.
“We have growing confidence,” noted HSBC, quoting Fed chair Jay Powell’s remarks at a January meeting. “But not to the point where we feel like it’s a highly consequential decision to start the process of dialling back on restriction.”
A version of this article was first published by Nikkei Asia on February 27. ©2024 Nikkei Inc. All rights reserved.
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