Singapore Banking Review

Bucking the trend - October 2019

Over the past three years the banking industry has faced unprecedented challenges and a confluence of external drivers. At a macro-economic level, we have been ushered into a low interest rate environment amid flat to declining Gross Domestic Product (GDP) across most mature markets, and a worsening credit outlook scenario led by increasing tariffs, global uncertainty and a slowdown in China.

Regulatory reforms, more stringent capital and reporting requirements and new risk management considerations are inflating the cost of doing business. At the same time, technological and societal changes have been propelling digital disruptions and more demanding consumer preferences.

Against this backdrop, to get a data-driven view on key factors impacting Singapore’s domestic banks, we analysed the aggregate performance of DBS, OCBC and UOB over the past three years against UK banks (Barclays, Lloyds and RBS), and Australian banks (ANZ, CBA, NAB and Westpac).
 

Highlights of performance analysis

Singapore banks outperformed UK and Australian banks across all measures, including achieving annual growth of 7% in top line income and 14% in profit over the past 3 years. Based on our analysis, we believe Singapore banks have the potential to outgrow their UK and Australian counterparts over the next five to eight years, continuing their current top line growth buoyed by sustained investment in overseas markets.

Other factors supporting Singapore banks’ future growth momentum include: 

  • Capacity for continued lending growth from a strong domestic deposit funding base and organic capital generation driven by historically low dividend payout ratios
  • Less pronounced impact of upcoming Basel Reforms on capital requirements compared to the UK and Australian banks, given Singapore’s already existing conservative regulatory settings for risk exposures, and in particular market risk

Performance snapshot and three year trend

Annual income

Income remained flat to declining for Australian and UK banks, reflecting limited growth potential outside of ‘saturated’ home markets, and as decisions were taken to reduce or exit certain businesses. In contrast, Singapore banks demonstrated top-line annual income growth of 7%.

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Return on Equity

Singapore banks were able to increase Return on Equity steadily despite a mature local economy through growth in overseas  markets, particularly Hong Kong and China. UK and Australian banks profitability were impacted by reduced opportunities for growth and in incurring significant costs associated with repairing customer trust.

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Net Interest Margin

Singapore banks consistently delivered stronger Net Interest Margin as SIBOR rose, going against the tide of UK and Australian banks.

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Cost-to-income ratio

Singapore banks demonstrated disciplined cost management whilst the cost of rebuilding customer trust and maintaining higher compliance costs impacted UK and Australian banks.

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Lending

Lending asset growth for Singapore banks exceeded that of UK and Australian banks through their overseas lending, particularly in Hong Kong and China. We see Singapore banks as increasingly ‘business lenders’ and Australian and UK banks as ‘retail lenders’.

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Dividend pay-out ratio

Whilst capital ratios are steady, dividend pay-out ratios were broadly reflective of earnings volatility in each region - UK banks being most volatile and Australian banks being the least. Australian banks payout ratios are trending up, reflecting limited potential for growth and possible changes to future dividend pay-out rates. In contrast, Singapore banks pay-out ratios are low, suggesting a strong confidence in lending growth, and possible increased dividend potential going forward.

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Risk scenarios: 'What ifs'?

Our report also highlights simplified assumptions underpinning four ‘What if’ scenarios to illustrate the relative downside risks across the major banks. We see these ‘What if’ risks as -  

  • Scenario 1: Interest rates go to zero in mature markets
  • Scenario 2: Tariffs and economic downside risks eventuate in a Greater China building and construction industry downturn
  • Scenario 3: Singapore banks face the ‘trust deficit’ with customers that the UK and Australian banks experienced (this is a Singapore banks specific scenario)
  • Scenario 4: Digital banks capture 20% of domestic retail market share

We extended our analysis to illustrate whether Singapore banks are more susceptible to certain scenarios versus the UK and Australian banks and explored what they can do to mitigate these risks and keep up the growth momentum.

Contact us

Yura Mahindroo

Partner, PwC Singapore

Tel: +65 8182 5177

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