MAS Annual Report 00/01

Overview

Real value-added of the banking sector grew by 4.9% last year. This reflected stronger performance of domestic banking and modest growth in offshore banking.

Domestic commercial banking activity improved with a pick-up in both non-bank and interbank loans. However, total domestic assets of both merchant banks and finance companies contracted for the third consecutive year. (See Chart 21.) This reflected ongoing consolidation and rationalisation in the two groups. For merchant banks, interbank assets fell although loans to non-bank customers showed an increase. Finance companies benefited from a strong demand in hire-purchase financing for motor vehicles but faced intense pressure from banks in the housing mortgage and personal loans markets.

Domestic Banking

Commercial Banks

Commercial banks' total assets and liabilities grew by 5.4% to reach $344.0 billion at end-2000. Both non-bank and interbank lending contributed to the increase. (See Chart 22.) Loans to non-bank customers grew by 4.7%. The year-on-year decline in loans bottomed out in the second quarter of the year, led by a recovery in loans to professional and private individuals.

DBUs' assets with banks in Singapore showed a sharp 44.4% increase as at end-2000 but this was from a depressed end-1999 base at the Y2K cross-over. A more moderate 11.5% year-on-year growth in domestic interbank assets was registered in January 2001.

DBUs' net interbank position vis-à-vis Asian Currency Units (ACU)and banks outside Singapore switched from a net asset position of $5.1 billion at end-1999 to a net liability of $9.8 billion. Foreign interbank claims fell by 3.9% while foreign interbank liabilities rose by 14.4%.

Non-bank customers' deposits with DBUs fell 1.8%, mostly in fixed and savings deposits. Fixed deposits made up a lower 52.4% of total deposits. The share of savings deposits stayed at 33.6%. (See Chart 23.) Demand deposits recorded moderate growth of 9.1% after a 17.6% growth in 1999. As at end-2000, demand deposits comprised a higher 13.8% of DBUs' total deposits. Other deposits maintained a 6.9% growth over the year.

Merchant Banks

Total assets/liabilities of merchant banks' DBUs contracted for the third year running, in line with the ongoing consolidation in this industry. Five merchant banks ceased operations during the year. Interbank assets declined by 7.7% while interbank liabilities fell 18.2%. There was also a slight 1.4% drop in their capital and reserves to $4.8 billion.

However, loans to non-bank customers recovered,growing by 17.2% after a 19.0% drop in 1999. Investments in securities also expanded by 7.8% for a second consecutive year.

Off-balance sheet activities showed mixed performance. The amount of funds under portfolio management rose by 8.1% to $2.6 billion. The volume of underwriting business recovered sharply, by 92.8%, to reach $657.4 million during the year. As a result, underwriting fee income rose by 116.1% to $6.7 million in 2000.

However, fees earned by merchant banks from mergers, acquisitions and other financial advisory services fell by 31.1% to $27.5 million during the year.

Finance Companies

Reflecting the ongoing rationalisation and consolidation in the sector, total assets and liabilities of finance companies contracted further by 4.5% to $19.8 billion at end-2000. The absorption of two finance companies into their parent banks, as well as increased competition from banks, contributed to the reduction.

Finance companies registered a 1.0% increase in loans to non-bank customers, after two consecutive years of negative growth averaging 6.6% per annum. Their credit activity was supported by an increase in demand for motor vehicle financing, in line with larger COE quotas for vehicle purchases during the year. Vehicle hire-purchase loans increased by 32.0% to $5.1 billion in 2000, up from a 8.6% growth rate in 1999.

However, finance companies continued to face intense competition from banks in the housing and personal loans markets. Housing loans fell 20.9% to $2.8 billion, accentuating a drop of 8.4% in 1999. Loans to the building and construction industry and to professional and private individuals continued to decline, by 1.2% and 12.0% respectively.

Placements with banks and other financial institutions fell 39.0% to $1.7 billion in 2000, after a marginal increase in 1999. This was mainly due to consolidation of the two bank-owned finance companies with their parent banks. Investment in securities and equities registered a slight drop of 0.7% to $1.7 billion.

Total deposits fell further, by 4.7% to $13.6 billion in 2000. During the year, finance companies increased borrowings from banks and other creditors by 1.0% to $1.0 billion, to fund their lending activities.

Offshore Banking

Lending to Asia has not recovered from the 1997 Asian crisis. Borrowers from developed countries continue to dominate international bank lending, with the US surpassing the Euro area as the largest recipient of the flows.

According to the Bank for International Settlements (BIS)international banking statistics, for the period 1999 to the third quarter of 2000, activity in Singapore's ADM contracted by 1.9%, while international banking activity of other BIS reporting centres grew by 3.8%⁴. (See Chart 24.) The low activity in Singapore mirrored developments in other parts of Asia where credit demand remained low and international creditors reluctant to lend. This reflected the political uncertainties in the crisis-affected countries, and the weak and uneven pace of bank and corporate restructuring.

Despite the contraction in Singapore's ADM activity, Singapore's share of the international banking pie remained at around 4%. Lending activity in Singapore's ADM appears to have recovered from late 1999, led by interbank lending to Europe and the US. Total assets in Singapore's ADM grew by 1.3% for the year 2000, reversing two years of decline. This was mainly due to an increase in interbank loans, especially to Europe and the US. However, lending to non-bank customers continued to decline, primarily reflecting the retrenchment of lending by Japanese banks. (See Chart 25.) As a result, the share of Japanese banks' ACU assets in 2000 was half that in 1995.

From the international perspective, Japanese banks have renewed their lending, both interbank and non-bank, to Europe and the US. According to BIS statistics, two-thirds of the flows to Europe were denominated in Yen and were used to finance mergers and acquisitions and purchases of third-generation mobile phone licences.

Deposits of non-bank customers rose by 2.7% in 2000,while interbank deposits continued to decline, dampened by a withdrawal of funds by Japanese banks. As a result, the share of interbank deposits in total ACU liabilities fell from 68.0% to 66.1%. Reflecting the low interest rate environment, non-bank deposits grew by a slower 2.7%, compared to 7.3% in the previous years. (See Chart 26.)

Syndication Activities

The low activity in the ADM since the Asian crisis is also reflected in the slower growth of the syndicated offshore loans market in Singapore. In 2000, 15 syndicated facilities totalling $3.76 billion came under the Tax Exemption Scheme for Syndicated Facilities. This was significantly lower than the amount of facilities for 1999. This was mainly due to the withdrawal from regional markets which account for a substantial share of syndication deals arranged in Singapore. Much of the activity in the syndication market centred on the restructuring of existing defaulted loans or loans in distress.

4 In this analysis, comparisons between Singapore's ADM and other centres are based on reported BIS data. All other references to Singapore's ADM are based on MAS data. ADM lending between ACU and to banks in Singapore are excluded from BIS data.