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Spike in foreign currency bonds expected from S'pore banks
SINGAPORE banks are expected to step up their foreign currency bond sales to fund increasing intra-regional expansion. This comes as Asean banks step up bond issuances overall, as loans growth outpace deposit inflows, said Moody's Investors Service in a report on Monday.
Banks in Singapore and Malaysia have increasing foreign-currency funding requirements arising from their active pursuit of intra-regional expansion, added Moody's. The three Singapore banks have been active in tapping the foreign currency debt market to fund their growing trade finance business as they follow corporate customers expanding in the region.
OCBC Bank sold US$1 billion 4 per cent subordinated notes in April this year and they were the bank's first Basel III compliant capital instrument. It followed with another US$1 billion of 4.25 per cent subordinated notes in June. "We do not have immediate plans to issue any new capital but would not rule out the possibility of further bond issuances in the future as part of our ongoing efforts to manage the capital and funding mix," said Ang Suat Ching, OCBC Bank's head of funding and capital management.
"The US dollar (USD) market offers good liquidity and the USD is a freely traded and recognised currency that the local banks need in order to grow their balance sheets beyond Singapore. It is also demanded by clients to facilitate their global business activities," said Ms Ang.
DBS Group Holdings in July sold US$1.25 billion bonds due 2019, made up of US$750 million fixed rate tranche and US$500 million at floating rate.
United Overseas Bank in Q3 issued US$500 million and A$300 million of senior unsecured debts which further strengthened and diversified the funding base, the bank said last month.
Lee Wai Fai, UOB's chief financial officer, said that while the bank is committed to maintaining a sustainable funding base that is anchored on deposits, it also seeks opportunities, from time to time, to tap alternative funding sources. "By tapping the bond markets on a regular basis, we are able to maintain a close relationship with our international investors, diversify our funding mix and optimise our funding costs," said Mr Lee.
Moody's said that Asean banks will increasingly turn to capital markets, particularly by issuing bonds, in order to fund their lending operations.
"Loan growth in most parts of the Asean region has steadily outpaced deposit inflows over the past several years, leading banks to use most of their stock of deposits to fund loans," said Alka Anbarasu, Moody's assistant vice-president and analyst.
In addition, some banks have turned to their excess liquid assets as an alternative source of funds, a source Moody's believes is also diminishing.
"Going forward, we expect that further growth will also be driven by funding needs, rather than solely by choice. Therefore, funding and liquidity will increasingly become factors that differentiate Asean banks' credit profiles," said Mr Anbarasu.
Outstanding bonds and borrowings (excluding interbank loans) by rated Asean banks increased by 71 per cent to US$168 billion at end-2013 from US$98 billion at end-2009. This was in part driven by opportunistic market tapping at a time when credit spreads were low and investors' appetite for Asean bank debt was growing. Moody's noted that loan-to-deposit ratios (LDRs) rose to around 90 per cent at most Asean banks at end-2013 from the low 80 per cent-range at end-2009.
Indonesian banks appear the most stretched, particularly in local-currency funding. Banks in Thailand and Vietnam have some of the highest foreign-currency LDRs, indicating elevated foreign-currency funding needs.
Singapore banks' LDR ratio has been steadily rising, and in June reached 110.6 per cent, the highest since 1998.
Singapore's loan growth is expected to remain around the 10 per cent level while deposit growth is likely to languish near zero, said a DBS Research report at end-September.
As for their LDR, the three domestic banks have lower Singapore dollar (SGD) LDR given their bigger branch network versus the foreign banks.
DBS said at end-September, group LDR was 86 per cent while SGD LDR was 78 per cent. The bank, which has been aggressively growing its trade loans, said non-SGD LDR was 95 per cent. OCBC Bank's group LDR at end-September was 85.5 per cent; SGD LDR was 80.2 per cent and USD LDR was 99.5 per cent. United Overseas Bank said at end-September its SGD LDR was 94.1 per cent and USD LDR was 70.6 per cent; group LDR was 85.8 per cent.
Overall, Moody's expects loan growth for Asean banks to remain robust in the mid-teens in percentage terms, supported by continued infrastructure spending and working capital needs; increasing penetration of banking services, particularly in Indonesia and the Philippines; and cross-border loan demand due to regional expansion by Asean corporates and greater demand for trade finance.