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Asia-PacificDecember 8 2010

Singapore's banks are being forced to go overseas

Singapore's banks have reported stable but modest profits in recent years, but this is coming under threat from low interest rates and a lack of opportunity in an overcrowded market, leading many to consider international expansion. Writer Michelle Price
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Singapore's banks are being forced to go overseasBack on the crane gang: Singapore posted a 39% quarter-on-quarter growth in GDP in Q1 of this year

Local Singaporean bankers joke that the easiest way to assess the health of Singapore's economy is to look outside the window and observe the activity of the city-state's famous shipping port harbours: if the cranes are down, it's bad news. By August this year, however, Singapore's harbour cranes were busy filling the thousands of container ships that drop anchor in the world's busiest shipping port. Against a backdrop of thriving economic activity, the export-driven economy posted a staggering 39% quarter-on-quarter growth in gross domestic product (GDP) in the first quarter of 2010.

Buffered by mammoth fiscal reserves that allowed the Singapore government to quickly roll out a bumper stimulus package amounting to 8% of GDP in January 2009, the south-east Asian country has rebounded quickly and spectacularly from the global economic slump. As with several of its south-east Asian neighbours, Singapore's corporate sector entered the crisis in a state of relatively low leverage, while the country's household balance sheet is among the strongest globally.

"There was no household consumer recession in Singapore," says Tai Hui, regional head of research for south-east Asia at Standard Chartered. "Most of the recession took place on the corporate side and, as a result, the recovery has been very swift and we've seen a spectacular rebound in exports."

As a result, the country's small and highly consolidated banking sector has remained relatively insulated from the shocks of recent years, with asset quality remaining robust throughout the duration of the global financial crisis. "As the Singapore economy began its rebound in the third quarter of 2009 and as global financial markets recovered, Singapore banks' asset quality improved and earnings were boosted," says Teo Swee Lian, deputy managing director of financial supervision at the Monetary Authority of Singapore (MAS). "The sharp rebound in the Singapore economy, and the fact that Asia's recovery had also been sharper and faster than expected, also helped Singapore banks," she adds.

Asset quality

While Singapore's system-wide non-performing loan ratio rose slightly during the most severe phase of the crisis, peaking at 1.9% in March 2009, asset quality has since improved, falling to 1.5%, according to the MAS. Loan growth, meanwhile, has put in a good performance since early 2009. United Overseas Bank (UOB), the country's third largest lender by assets, grew its net loans by 6.1% for the first half of 2010. The bank's larger rival, Overseas-Chinese Banking Corporation (OCBC), saw a 21% expansion during the same period, while the country's largest bank, DBS Bank, put in 14% loan growth.

As such, banking has staged a sharp upswing in terms of financial results, while brokerage and wealth management have proved slower in posting gains. According to analyst firm Moody's, Singapore's banking sector presently ranks as the fourth most robust in the world, alongside those of Canada, Australia and Hong Kong.

Under pressure

However, there are still challenges for the Singapore banking market.

In recent years, Singapore's banks have reported consistent but relatively modest profitability, ranging between 1% and 1.2% in terms of return on assets, according to rating agency Standards & Poor's. The sector is also struggling to expand its stable fee-based income, with some 60% of system-wide revenues derived from net interest income, underpinned by an extensive and deep retail deposit base. But this income is under pressure as ongoing rock-bottom interest rates take their toll on lending margins.

Low interest rates are not unique to Singapore, but the country's highly mature banking sector, which remains awash with deposits, offers few other domestic opportunities for revenue growth, say bankers. "The margins in Singapore tend to be under pressure," says Piyush Gupta, who was appointed CEO of DBS Bank, the country's largest lender by assets, just over a year ago. "There are too many people and too much money, chasing too few opportunities."

This problem is compounded by the city-state's relatively small mortgage market, complain bankers. According to Fitch Ratings, about 70% of Singaporean system-wide loans are extended to businesses, with the remaining 30% accounted for by retail customers who, for the most part, take out mortgages. But the retail mortgage business is very small relative to other regional economies, according to Mr Gupta. "In most economies, housing is a big sector for banks. But, in Singapore, a large part of the housing sector is financed by the government and that does not spill over into the banking sector."

Both Singaporean and Hong Kong banks have, in recent quarters, struggled to generate decent margins in their mortgage books as the low interest rate environment continues to subdue yields. The situation has not been helped in recent months by the Singapore government's attempt to dampen inflation in the residential property market, which saw prices jump 38% year on year in the second quarter, according to Bloomberg. In September, the government unveiled measures designed to target property speculators, including changes to stamp duty charges, reductions in the loan to value ratio, and the requirement for increased deposits, which are likely to limit the lending market further.

And according to Anil Wadhwani, CEO and head of consumer markets at Citi Singapore, the unsecured lending business and, in particular, the credit card market (a key target market for both Citi and OCBC) is no more forgiving. "In a recent survey, Singapore came top as the most competitive market for financial services - and this includes retail," he says. "The credit card market is fiercely competitive: the average Singaporean has almost six cards in their wallet."

Fees and commissions on credit cards suffered during financial year 2009, down 18% at OCBC and 14.9% at UOB. However, they remained stable for DBS, although growth has returned during 2010.

Foreign expansion

In the absence of domestic investment opportunities, Singapore is becoming a savings surplus country, says Mr Gupta. "This is true for much of Asia, but it is especially pronounced in the Singapore context. This means that investment opportunities for Singapore banks to grow have to be found outside Singapore," he says.

DBS has big plans on this front. Despite being one of south-east Asia's largest banks by assets, some 60% of DBS's revenues are derived from Singapore. "Thinking about what we want to be in the future, we really want to focus on our back yard and be an Asian player - not just in terms of geography but in terms of the type of banking we do," says Mr Gupta. Over the past two years, the bank's limited presence in the UK, the US, Japan and the Middle East has brought little in the way of strategic advantage and often accounted for a disproportionate amount of the bank's bad loans. "We've made a decision not to participate in those markets and focus on Asia as our hunting ground. Our aspiration is to have a more balanced profile in Asia and to mix our geographical earnings base over the next few years. We need to start running like a true Asian bank."

In February, the bank unveiled its strategy to diversify its geographical revenue mix, and Mr Gupta is targeting a split of 40%, 30% and 30% from Singapore, Greater China and south-east Asia, respectively. The bank's Greater China expansion strategy, in which it will invest S$1.5bn ($1.15bn) over the next decade, will be achieved through the creation of 50 so-called 'points of presence' during the next four years. "We think China and Indonesia represent big opportunities for us," says Mr Gupta.

Like DBS, UOB has been especially cautious regarding its overseas operations and the bank cut its exposure to Western markets during the first half of this year. The country's third largest lender is also growing its key regional markets, Malaysia, Indonesia and Thailand, while reducing lending in Western countries, the bank revealed at a press conference in August. But UOB is planning to target organic growth in these markets, according to CFO Lee Wai Fai.

Meanwhile, OCBC plans to focus its expansion efforts on Malaysia and Indonesia, where the bank already has 34 and 382 branches, respectively. It is also looking at China and to a lesser extent Indochina, where it will explore strategic tie-ups. The bank is presently awaiting regulatory approval to incorporate in Vietnam. In Indonesia and China, OCBC sees opportunities in the consumer and small and medium-sized enterprise (SME) markets, and the bank has already opened a small number of branches in Shanghai. It is also investing S$347m to increase its existing stake in China's Bank of Ningbo from 10% to 13.7%.

Consolidation warning

All Singapore's banks have ambitions to expand regionally, but some market-watchers believe that they will not be able to develop a meaningful presence in any of these markets unless there is further consolidation in the country. Speaking at a banking conference in July, former prime minister and founder of modern Singapore, Lee Kuan Yew, told delegates that the industry needs to be further consolidated - although the MAS has not made any plans public.

Domestically, OCBC has been acting lately as a consolidator with its $1.45bn acquisition of ING Asia Private Bank, renamed Bank of Singapore. The move underpinned the bank's expansion into wealth management, a business which - despite being dented by the global financial crisis - has boomed during the past decade thanks to the region's growing ranks of millionaires. Indeed some market-watchers tout Singapore as 'the next Switzerland' after overall assets under management (AUM) in the city-state swelled to a record S$1200bn at the end of 2009, the highest figure in Asia, according to Reuters.

"Singapore has made a conscious attempt to position itself as centre of excellence when it comes to wealth management," says Citi's Mr Wadhwani. "The top end of the affluent sector is only going to grow." Indeed, according to the MAS, AUM in Singapore grew 40% year on year between the end of 2008 and 2009. Along with credit cards and other forms of unsecured lending, Citi hopes to dominate the wealth management space.

But Citi and the local banks will face fierce competition from a raft of other global players, including the likes of Swiss private banking giants Credit Suisse and UBS, which are also looking to expand further in Asia. "We have seen a slew of private banks emerge in Singapore, and they have changed the competitive scenario dramatically," says Mr Wadhwani.

DBS, which this year hired one of Morgan Stanley's leading regional private bankers, Tan Su Shan, is also targeting wealth management. "Two businesses we want to be known for over the next five years are the SME business, and wealth management. DBS in Singapore is at even more of an advantage because we are seen as the gold standard from a safety point of view," says Mr Gupta.

Thinking big: DBS Bank CEO Piyush Gupta is eyeing international expansion

Thinking big: DBS Bank CEO Piyush Gupta is eyeing international expansion

Thinking big: DBS Bank CEO Piyush Gupta is eyeing international expansion

Treasury and transaction

Another area of growing interest for DBS Bank is treasury services and transaction banking, which it plans to develop during the next five years - particularly in China, where the anticipated internationalisation of the renminbi promises to generate speculator growth for transaction services. DBS has said it plans to invest S$250m and hire 200 people over the next five years to expand its treasury and markets business across Asia.

According to Karen Fawcett, the group head of transaction services at Standard Chartered in Singapore, the move forms part of a general maturing of the transaction business among Singapore's local banks. "In transaction banking, we've seen the local banks gradually distinguishing transaction banking as a product, which is recognition that they need to become more sophisticated in this."

As the local banks continue to expand across Asia, treasury and transaction banking are set to become an increasingly important revenue stream. Local bankers also predict that many Western corporates, in a bid to avoid the rise of regulation in Europe and increasing taxation burden, are likely to move operations to Singapore - and, according to Mr Fawcett, some companies have already made the move.

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