Regulatory traps stall Singapore banks’ expansion

Greater regional exposure also comes with increased regulatory complexities.

It’s do-or-die time for Singapore banks as they push for their regional expansion plans and grapple with increasingly dangerous risks. While the domestic market has showered Singapore banks with rising interest margins, their attention is locked on to the tasty regional banking pie that is growing larger every year.

While expansionary greed can be good and even necessary for Singapore banks to avoid growth stagnation, analysts warn against regulatory traps and operational barbs lying in wait.

The value of regional exposure
“A regional footprint helps the banks to diversify their revenue streams and broaden their service offering, enabling them to better benefit from cross-border trade, greater Association of Southeast Asian Nations (ASEAN) integration and rising incomes across the region,” says Elaine Koh, director at Fitch Ratings. However, she cautions that greater regional exposure also comes with increased regulatory complexities and risks associated with emerging markets.

“Growing offshore operations – in foreign currency and in countries with more variable credit cycles – may challenge the banks’ historical funding, asset quality and regulatory oversight strengths,” she adds.

Koh says Singapore banks have so far managed such risks prudently. But if they are determined to compete with foreign players and non-bank institutions in non-lending activities – such as in wealth management, bancassurance, payments and transactions and capital markets services - Singapore banks will need to bolster their product and technological innovation.

Higher interest rate threat
Singapore banks should also be concerned about the decline in asset quality across their regional loans due to the prevailing higher interest rate environment, even as their domestic operations see a spike in net interest margins.

BMI Research notes that the average net interest margin across Singapore’s three main domestic banks – DBS, UOB and OCBC – rose to 1.87% in the second quarter of 2015, a nearly three-year high. This pushed total net interest income across the three banks to an all-time high of S$4.3 billion.

Singapore banks suffer some asset quality deterioration in its ASEAN loan book, says Sharnie Wong, analyst at Barclays, with DBS having already pointed to mild deterioration in Hong Kong and Singapore small and medium enterprises.