SINGAPORE – Singapore banks received an earnings boost from high interest rates in 2023, but they continue to face sluggish loan demand and the possibility of margins peaking.

Investor sentiment also remains fragile in the uncertain macroeconomic climate, continuing to hinder fee income growth despite the recovery in recent quarters.

Loans at DBS Group Holdings, OCBC Bank and UOB grew just 1 per cent year on year, or were flat on a constant-currency basis in the third quarter.

This comes even as net interest margins (NIMs) – a key gauge of a lender’s profitability – rose between 14 and 29 basis points at the banks, which ended their earnings season on Nov 10.

Interest rates continue to be elevated globally as the United States Federal Reserve on Nov 1 held its benchmark lending rate at a 22-year high to deal with stubborn inflation. It has hiked the rate 11 times since March 2022.

Mr Thilan Wickramasinghe, Maybank Investment Banking Group’s research head for Singapore, said it is still very unclear as to when rates will be cut, with market expectations pointing only to the second half of 2024.

“As long as interest rates stay higher for longer, it will sap away loan demand as customers either pay down loans or postpone investment decisions.”

Phillip Securities senior research analyst Glenn Thum said there is a slim chance of a slight pick-up in loans in the first half of 2024 as consumers adjust to high interest rates.

DBS and OCBC expect loans to grow at a low single-digit percentage for the whole of 2023, while UOB is guiding for a low-to-mid single-digit growth. Without adjusting for currency, loans fell 2 per cent across the lenders.

Mr Wickramasinghe expects that South-east Asia will lead credit demand when loan growth eventually turns positive, given that the region is set to grow faster than China in 2024.

“Infrastructure, manufacturing, construction and natural resources could be key sectors to watch out for as investments in China+1 supply chains accelerate,” he said, referring to a strategy of diversifying business operations beyond China.

Mr Willie Tanoto, a director in Fitch Ratings’ Asia-Pacific financial institutions team, said that even when rate cuts happen, borrowing costs will still be relatively high and companies will likely use existing liquidity. 

Emerging markets in Asia account for about a quarter of Singapore banks’ total lending, but the demand for loans might not always match lenders’ risk appetites or business strategies in these markets, he said.

“Hence, we project only low single-digit overall loan growth in 2024.”