Financial institutions hike fees, lower fixed deposit rates

Increase in fees may help cushion expected compression in banks' interest income


BANKS have been hiking fees - a move that could help cushion the expected compression in their interest income - as analysts expect fee income contribution to rise for local banks.

At least one pundit, however, points out that the hikes might not generate higher fee income if consumers seek alternatives.

OCBC Bank is raising fees this December for at least three segments: credit card cash advance fee, credit card foreign currency transaction administrative fee as well as annual fee and late fee for personal standby credit line.

OCBC, however, was not the first among the local trio to fire the salvo. Its latest move to raise administrative fees for credit card foreign currency transactions followed Overseas United Bank's (UOB) September hike and DBS Group's November increase.

DBS and UOB spokesmen told The Business Times that they periodically review and adjust their fees to ensure that they are competitive and in line with the market. OCBC said its fees are reviewed "in accordance to adjustments within the industry".

DBS and UOB saw their loan-related and credit card fee and commission income edge up in the third quarter to September as well as the first nine months.

DBS reported a 6 per cent increase year-on-year for its third-quarter loan-related income to S$117 million and an 8 per cent improvement for its the nine-month figure at S$323 million.

South-east Asia's largest bank generated S$202 million in cards fee income or 9 per cent higher year-on-year for the third quarter and S$589 million or a 15 per cent increase for the nine-month period.

Cards fee was the bank's second largest contributor to its net fee and commission income. Wealth management fee was the top contributor.

DBS Group CEO Piyush Gupta said at the bank's recent quarter results briefing: "Our fee income has been strong. The momentum is good and broad-based, from wealth management, cards, loans and cash management."

UOB posted loans-related fee income of S$152 million for the third quarter, 13 per cent higher year-on-year. The nine-month figure was S$468 million, up 10 per cent.

UOB's credit card fee income rose 14 per cent to S$126 million for the third quarter and improved 11 per cent to S$352 million for the nine-month period.

OCBC registered declines in both loan-related and credit card fee income for both the quarter and nine-month period.

The bank's loan-related fee for the quarter was S$78 million (down 3 per cent) and S$224 million (2 per cent lower) for the nine-month period.

Its credit card fee income declined 3 per cent and 5 per cent respectively to S$253 million for the first nine months and to S$88 million for the quarter.


RHB Securities Singapore analyst Leng Seng Choon, in a recent report titled 2020 Earnings To Be Driven By Non-Interest Income, wrote that banks' total income should mainly be from non-interest income.

Key categories for fee income for banks are wealth management, credit cards and capital markets services such as broking, fund management and investment banking.

Thilan Wickramasinghe, Maybank Kim Eng analyst, told BT: "We expect fee income contribution to pick up pace, given the latest FOMC (Federal Open Market Committee) decision to keep interest rates flat in 2020."

The US Federal Reserve's FOMC decides the funds rate. The funds rate is the interest rate at which depository institutions lend balances at the Fed to other depository institutions overnight.

Jefferies analyst Krishna Guha told BT that higher upfront fees can offset lower interest rates charged on some of the products.

"The extent of benefit will depend on volumes as well. If bank customers shift to other methods for overseas spend such as YouTrip, it ultimately won't benefit fee income," he said.

YouTrip is a financial platform offering a multi-currency mobile wallet with a contactless Mastercard to make payments worldwide without having to incur any fees, according to YouTrip website. Its revenue comes from a cut of each purchase from the merchant through Mastercard.

On the other hand, RHB's Mr Leng said that local banks' net interest income is "seen to be flattish", given that their managements' guidance for a net interest margin (NIM) squeeze and soft loan growth.

Banks' NIM hinges on the Fed funds rate, which has been cut thrice this year.

Singapore's benchmark for pricing loans and setting fixed deposit rates - Singapore Interbank Offered Rates (Sibor) - tends to move in tandem with the funds rate.

The three-month Sibor has dropped from 2 per cent in late May to now hovering at 1.77 per cent.

Following interest rate cuts in the US, banks in Singapore have lowered their fixed deposit (FD) rates, Tin Min Ying, research analyst at Phillip Securities Research, noted in a recent report.


Compared with September fixed deposit rates, most banks and finance houses' December rates are less attractive, standing at 1.4 per cent to 1.8 per cent, following cuts ranging from 0.03 per cent (Hong Leong Finance) to 0.3 per cent (Maybank).

Only UOB and Sing Investments & Finance - among those that BT tracked - are offering higher interest rates than what they offered in September.

Phillip Securities' Ms Tin said: "Despite the recent Fed rate cuts and downward adjustments of FD rates, FD is still growing strongly. We believe that one of the reasons for sustained demand for FD was due to the saturation of appetite for Singapore Savings Bonds (SSBs). The total amount applied for SSBs in November and October was S$44 million and S$51 million respectively, down from the peak of S$457 million in February and YTD (year-to-date) average of S$252 million."

First-year coupon rate of Singapore Savings Bonds for the January issue (applications close on Boxing Day) is at 1.52 per cent - the lowest since the May 2018 issue.

In addition, tight liquidity in the banking sector sustained the competition for deposits, making it difficult to lower fixed deposit rates too much in the near term.

Therefore, investors would still opt for banks' fixed deposits, which offer higher rates than SSBs' first-year coupon rate, Ms Tin added.

Still, she expects competition for fixed deposits in 2020 to ease, due to further rate cut expectations and slower global economic growth.