What does the record high loan to deposit ratio of 99.8% mean for Singapore banks?

DBS, OCBC, UOB should be immune to higher funding costs.

According to a recent report, Singapore's system loan to deposit ratio rose to 100% in May, another record high since 1999. Barclays predicts deposit competition and margin pressure to persist in the near-term.

We interviewed some analysts to learn what their thoughts are on Singapore banks' record high LDR and here's what they have to say:

Macquarie Securities: Matt Smith, Senior Analyst
The system LDR has been increasing more-or-less steadily since the GFC. Currently both domestic business unit (DBU) and Asian currency unit (ACU) LDRs are at close to 100%, specifically 98% for the DBUs and 102% for the ACUs.

This could lead to higher costs of funding, which is potentially good news for depositors. Our sense is that foreign banks in particular may offer higher rates for SGD-denominated time deposits.

This could imply higher funding costs for the system. However, the three Singaporean banks should be relatively immune however because of their strong local currency funding bases, which is a function of their wide retail presence in the city.

They also enjoy low wholesale borrowing costs, a function of their strong credit ratings, so USD funding shouldn't be too much of a problem for them. Having said that, at a certain point the growth in loans will have to fall to levels that are closer to deposit growth.

This could have an impact on longer-term loan growth expectations.

Standard & Poor's: Ivan Tan, Director, Financial Services Ratings
We believe that the funding and liquidity profile of Singapore banks remain strong despite the rising loans to deposit ratio. Part of this increase is driven by a conscious decision by banks to protect their interest margins, which have continued to come under pressure amidst a low interest rate environment.

Banks have allowed there LDR to increase to reduce funding costs. In particular, they are increasingly diversifying into USD commercial paper to fund their USD loan book, as an alternative to customer deposits.