How Singaporean banks can manage interest rates holistically on both sides of the balance sheet
To fight inflation, Singapore’s Monetary Authority (MAS) has tightened its monetary policy five times over the past 18 months. However, on April 14, MAS noted that Singapore’s economy is growing slower than anticipated. Furthermore, based on the latest global developments, the institution anticipates a deeper slowdown for the rest of the year. As the existing tightening measures have yet to take full effect on the economy, MAS did not announce any additional changes.
In light of these tightening measures, banks have achieved outstanding earnings and expanded their loan books despite higher funding costs. Nonetheless, as the economic outlook worsens, balance sheets will be adversely impacted on the deposit and loan sides.
Why rising interest rates will slow down business for Singapore’s banks
Decreasing deposit base
Globally, the bankruptcies of banks in the US and the merger of UBS and Credit Suisse have shaken client confidence. Deposit holders have started to reduce their risk exposure by spreading assets across different banks. In addition, Singapore’s banks didn’t pass all MAS’ monetary policy changes on to investors, meaning that deposit holders have started to look for higher returns elsewhere. Instead of depositing their assets with banks, they have invested in other asset classes such as fixed-income products. The result is that deposit levels are decreasing, creating a challenge especially for smaller and digital banks with their lower deposit base.
- Continued slowdown of loan volume growth
Volume growth for loans for Singapore’s banks has slowed in recent months and will continue to slow for the rest of 2023. This development is attributed to the higher interest rates and worsening global economic outlook. In this environment, new customers (e.g., mortgage customers, small businesses) are less inclined to lock their financial future into loans at higher prices, and existing customers are striving to decrease their financial burden through higher repayments.
- NIM compression expected later this year
While MAS has paused its changes to monetary policy, inflation may remain sticky, requiring additional tightening measures in the coming quarters. Even if inflationary pressures decrease, banks still need to incentivize clients to keep deposits with them. Incentives may include higher interest on savings accounts and term deposits, increasing the cost of funding for the bank. Smaller and digital banks will face higher acquisition costs to lure clients away from the incumbent banks. As a result, the net interest margin (NIM) is expected to compress – more for smaller and digital banks than for incumbent banks.
Action plan for Singaporean banks as interest rates rise
With the current economic outlook, banks in Singapore need to manage the cost of funding carefully. To this end, banks need to offer their customers products and services with attractive prices.
- Understand the price sensitivity of your deposit book
Create transparency on your deposit book and identify price elasticities. Knowing how customers have reacted to price changes in the past can help you identify patterns in price sensitivity among different segments. This allows you to run simulations to determine the right products and prices for each client segment. Setting volume targets per client segment enables you to maintain deposit levels.
- Avoid high acquisition costs for new customers
It may be tempting to match competitors’ offers for deposits without differentiation. However, this would result in unnecessarily high acquisition costs as all new customers would receive the same rate. Especially for digital banks, this would quickly increase the cost of funding and compress the NIM. A better approach is to match new customers to existing client segments and leverage the price elasticity of the respective segment to set an individual price. This would also address the imbalance in rates between new and existing clients.
- Target the right client segments
The rising interest rates for loans will cause a higher rate of loan losses. In response, banks will introduce more stringent loan approval requirements. This will cause the loan book to contract – increasing the cost of funding. To maintain the loan book at current levels, new loans that meet these stringent requirements must be acquired. Understanding your client segments, product preferences, risk profiles, and price sensitivities is essential for this. Identify low-risk client segments with a positive spare cash flow after interest rate increases and focus your lending on these segments.
- Improve the loan life cycle experience
Loan applications are usually tedious for new customers, creating a barrier to successful submissions. This barrier can be lowered using digitalized processes with gamification components. These could include quizzes about financial literacy or games to teach financial concepts. In addition, as digital channels incur lower costs, loans submitted online could come with lower rates. Later in the loan life cycle, borrowers can be incentivized to repay their loans on time with special rewards.
In the new digital world, the best designs and concepts win. We at Simon-Kucher have extensive experience in digital platforms, dynamic pricing, and behavioural analytics and can help your bank revolutionize the way you price and offer products. We have developed many innovative platforms for banks to improve customer acquisition, retention, and cross-selling by incorporating gamification elements and nudging effects.
All our platforms are future proof: Our comprehensive monetization strategies aren’t limited to high-rate offers. We develop engines that forecast and recommend the best rates for efficient book management.
Interested? Check out Simon-Kucher Dynamica Deposits – our end-to-end software for data-driven deposit managers within the financial services industry.