May loans growth could signal battle for deposits

[SINGAPORE] Analysts are watching how growth in loans in Singapore has again outpaced that of deposits, and have flagged higher deposit competition among banks that will make funding more expensive for them.

This comes as preliminary figures from the Monetary Authority of Singapore (MAS) showed lending to businesses gave a big boost to overall loan growth in May compared to April, after months of tepid growth.

Singapore-dollar loans stood at $598 billion in May, up 1.1 per cent from a month ago. This was much stronger than the 0.6 per cent increase in April.

The lift came mainly from the 1.5 per cent growth in business loans in May to $368 billion. In April, business loans were up 0.7 per cent.

To be sure, loan growth on a yearly comparison has been decelerating since December 2013. Loan growth in May this year compared to the same month a year ago stood at 13 per cent. This was weaker than the 13.2 per cent year-on-year growth posted in April.

Still, the stronger loan growth in May compared to April also comes against a deposit base that has shrunk for the second consecutive month.

Banks take funds from deposits and interbank lending from the wholesale market to fund their loans.

The ratio of loans to deposits is one way to show the extent banks can keep up with the pace at which they grow their loan book.

Deposits that include those denominated in foreign currencies stood at $537 billion in May, down 0.8 per cent from a month ago. In April, the deposit base had shrunk further by 1.5 per cent.

Taken together, the loan-to-deposit ratio (LDR) in Singapore's banking system - which would include loans in foreign currencies - stood at 111 per cent in May, up from 109 per cent in April.

This is a record not seen since 1998, a Barclays report said yesterday.

"Funding costs will rise as banks compete on pricing to retain and attract deposits," the report said.

This is especially since Basel III liquidity ratios kick innext year or so, prompting banks to focus on deposit funding to meet the mandated amount of liquid assets needed to cover outflows during short-term market stress.

A Fitch report noted that even as local lenders "prioritise funding stability" to fund their growing operations across various markets, Basel III rules should not pose major challenges for the three banks here. Their LDRs are still between 75 per cent and 85 per cent for now.

Strength in business-loan growth came from gains in loans for manufacturing and general commerce purposes, though notably, growth in lending to both sectors can be volatile.

Lending for general commerce - the third-largest component in the business loan segment - grew 2.9 per cent to $83.7 billion. This reversed from a 0.8 per cent decline in April.

Construction loans - which make up the largest, or about a quarter, of all business loans - was up 1.1 per cent in May to $94.1 billion. This was weaker than the 2.4 per cent gain registered in April.

Total consumer loans were slightly stronger, rising 0.5 per cent to $229 billion in May. In April, this rose 0.3 per cent.