Singapore banks' loan growth to fall to 3.5% in 2015: Fitch unit's research

SINGAPORE banks' loan growth will stay subdued over the coming quarters, but the lenders stand to enjoy higher net interest margins as the market expects rates to rise, said a Friday report by Fitch Group's BMI Research.

BMI forecast total loan growth to fall to 3.5 per cent this year (compared to a 5.7 per cent expansion in 2014) as the property market continues to drag on the extension of new credit.

"Singapore's loan growth has recovered from negative territory, rising incrementally to 1.5 per cent year-on-year in June, following a 0.1 per cent contraction in May.

"However, with the economy mired in the doldrums (real GDP growth contracted 4.6 per cent in quarter-on-quarter, seasonally adjusted, annualised terms in Q2), we see little prospect of a significant pickup in lending growth over the coming quarters," it added.

Residential property-related loans in particular fell to a multi-year low of 4.9 per cent year on year in June, from 5.1 per cent previously.

As cooling measures are expected to persist over the coming quarters, both the rental and sales markets will probably continue to weaken.

"A continued fall in the former (ie. rental market) will exacerbate the downturn in the latter (ie. sales market)," BMI said.

That a huge supply of new units is set to come onstream over the next two years amid a slowdown in skilled-labour immigration (the most important marginal demand factor for investment properties) certainly does not help, it added.

"Meanwhile, net interest margins should continue to rise as interest rates normalise in line with expectations for hikes from the US Federal Reserve, supporting net interest income for local banks," it said.

Expectations of rate hikes, along with concerns over the ailing Singapore dollar and a relative weakening in the credit-worthiness of borrowers amid high debt levels, will work together to make property investment slightly less attractive, BMI said.

"While loan growth is unlikely to roar back any time soon, local banks have been reaping the benefits of the higher interest rate environment via rising net interest margins."

According to BMI, the average net interest margin across Singapore's three main domestic banks - DBS, OCBC and UOB - rose to 1.87 per cent in Q2 2015, a nearly three-year high, taking total net interest income across the three banks to an all-time high of S$4.3 billion.

"We expect this trend to continue over the near future as lending rates outpace the cost of funding amid a tighter lending environment, providing support for the banks' income outlook," BMI said.