Singapore Monetary Policy Tightening Is Credit Positive for Banks

The Monetary Authority of Singapore’s (MAS) tightening of monetary policy to benefit banks operating in Singapore, according to Moody's Investor Service.

In a statement, Moody’s said the MAS’s second tightening of monetary policy this year is credit positive for banks operating in Singapore as it should increase interest rates, which generally benefit banks’ net interest margins.

Singapore’s three domestic banks, DBS Bank, Oversea-Chinese Banking Corp., and United Overseas Bank will benefit most from rising interest rates because their loan-to-deposit spreads should widen as loans generally re-price faster than customer deposits.

Moody’s said higher interbank rates will generate better yields for investment of their surplus funds.

However, foreign banks that rely on wholesale funds will do less well because while their loan-to-deposit spreads should increase, those benefits will be partially offset by a higher cost of funds since they will need to borrow at higher interbank rates.

Singapore runs its monetary policy based on an undisclosed band for what is known as the Singapore dollar nominal effective exchange rate (or S$NEER). It adjusts and effects monetary policy by moving the band up or down. Last week, citing its concern about inflation, MAS said it would slightly steepen its currency appreciation path. It also said the policy band would be widened slightly to reflect the volatility across global financial markets.

The most recent monetary tightening was in April 2010, when MAS re-centered the exchange-rate policy band upward at the prevailing level of the S$NEER and started shifting it to a modest and gradual appreciation, away from the zero-percent appreciation it had maintained since October 2008.

Last Wednesday, the government also said that the Singaporean economy remained on track to achieve the overall growth forecast of 13% to 15% for 2010 despite a decline in growth momentum, which was an expected correction from the exceptional growth in the first half of the year.