Singapore Banks

Kim Eng on 26 June 2014

• The implication of a new framework for D-SIBs is foreign banks with a large retail presence in Singapore will have to locally incorporate their retail units.
• They will be subjected to higher capital and liquidity standards which are also applied to local banks.
• The change could lead to greater competition from foreign banks in search of higher returns; DBS is our top sector pick.

Large foreign banks to be locally incorporated
A framework for domestic systemically important banks (D-SIBs) is currently in the works. The immediate implication is foreign banks with a large retail presence in Singapore will have to locally incorporate their retail units. Standard Chartered Bank incorporated its Singapore consumer banking operation in 2012, after Citigroup (2005). Unlike Malaysia that requires all banks to be locally incorporated, many foreign banks in Singapore operate under a universal banking model. A bank is deemed to have a significant retail presence if its market share of resident non-bank deposits is 3% and above, plus it has at least 150,000 depositors with accounts of less than or equal to SGD250,000.

Little impact for now but competition could intensify
Locally-incorporated foreign banks are subjected to higher capital – 2ppts of capital above Basel 3’s stipulation - and liquidity requirements that are also applied to local banks. A foreign bank that is deemed a SIB in Singapore will also have to meet the prescribed liquidity coverage ratio, which requires banks to hold sufficient high-quality liquid assets to meet their net cash outflows over a 30-day period.

The retail operations of both HSBC and Maybank may be required to be locally incorporated with a minimum of SGD1.5b in paid-up capital. While this may level the playing field, foreign banks may
go up the risk curve in search of higher returns to commensurate with higher capital requirements. This could exert greater competitive pressure on the local banks. Maintain Overweight on banks. For exposure, DBS is our top pick as it is best positioned to take advantage of a rising interest rate environment. We would remain cautious towards OCBC.