Banks likely to feel the heat of Savings Bonds




THE upcoming Singapore Savings Bonds could hurt the banking sector by diverting funds away from bank deposits, according to a prominent economist.

Bank of America Merrill Lynch economist Chua Hak Bin said in a report last week that the bonds are likely to intensify competition for retail deposits and push up interest rates in a period of slowing loan growth and tepid economic expansion.

The bonds, which will be launched in the second half of the year and issued monthly, could account for as much as 5 per cent of individual bank deposits within five years, he added.

Individual deposits stood at $430 billion in April.

The bonds “could significantly reduce the flow of new individual deposits and pressure deposit rates”, particularly at some foreign banks, Dr Chua noted.

Issuing the bonds is part of moves to make low-cost investment alternatives more widely available to retail investors.

A key feature is that a bondholder can get his money back in any month, with no penalty.

People will be able to apply for each issue with as little as $500, and up to $50,000. They will be able to hold up to $100,000 of Savings Bonds at a time.

The interest rate will be higher than that for short-term fixed deposits, but lower than that for the longer-term Central Provident Fund (CPF).

The launch of the bonds comes at a time when banks are working to meet stricter liquidity requirements, in line with international standards under the Basel III framework, Dr Chua noted.

As at January, the three local lenders had already met the stricter requirements imposed by the Monetary Authority of Singapore on banks deemed to have a significant impact on the stability of the financial system and proper functioning of the broader economy.

Foreign banks that are considered “domestic systemically important banks” – including Citibank, HSBC, Maybank and Standard Chartered – will have to meet these stricter requirements by Jan 1 next year.

Banks, particularly foreign ones, have been offering higher interest rates to shore up their deposit base, Dr Chua noted.

“The additional competition from the Savings Bonds is likely to pressure deposit rates higher, at a time when the United States Federal Reserve is likely to start raising rates in the second half (of the year).”

This would put pressure on loan growth, which is already slowing, he added.

His concerns echo questions raised by Members of Parliament last month. MPs had asked about the potential impact of the Savings Bonds on banks’ fixed deposits and the overall banking system.

Senior Minister of State for Finance Josephine Teo told Parliament that the cap on an individual’s holdings of Savings Bonds would mitigate the programme’s impact on the banking system.

“In addition, we expect the programme’s size to be small relative to total bank deposits, and the impact on the banking system is therefore likely to be limited,” she noted.

DBS economist Irvin Seah said the Savings Bonds are unlikely to have a significant impact on interest rates, which are usually affected more by external events such as the expected US Fed rate hike.

“In any case, interest rates have to go higher eventually,” he said.

Foreign banks, which tend to be “more starved of liquidity”, have to be “more prudent and less aggressive in their lending practices”, he added.

“If they continue to be aggressive, they will always face a crunch.”




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