S'pore banks move to offset hit to profits ahead of rate cuts

Strategies include increasing volume of fixed-rate loans and building up deposits

- Prisca Ang

Local banks are taking steps to offset the hit their bottom lines could take once interest rates start falling in the United States.

The strategies include increasing the volume of loans that are fixed rate, putting on interest rate hedges, and working to build up deposits in current and savings accounts.

DBS chief executive Piyush Gupta said on Aug 7 that the bank has added nearly $65 billion of fixed-rate assets in recent years, bringing the total to $190 billion.

The bank's net interest income is now less sensitive to interest rate changes. For every basis point of the US Fed funds rate, net interest income will change by $4 million, down from $18 million to $20 million in 2021.

OCBC Bank is investing in high-quality but lower-yielding assets in preparation for what it expects will be two US rate cuts later this year.

Deploying liquidity to such assets has resulted in higher interest income but a moderation in net interest margin, a key gauge of profitability.

Group chief executive Helen Wong said on Aug 2 that the bank is also managing its funding and ensuring that its digital solutions allow it to take on new customers easily and so lift current and savings account deposits. The deposits are a cheap source of funds for banks.

"As interest rates come down, customers will be less inclined to put their money into long-term fixed deposits as well," she added.