Opportunities remain despite challenges faced by banks

The financial numbers look good and share prices are up, but this has not been an easy year for Singapore's banks.

A series of strict new rules has raised compliance costs, competition has intensified while the odd scandal or two has added some spice and drama to the sector.

But the difficult times have made the sector more resilient, so Singapore's banks will enter 2014 in a position of strength, but experts say the challenges are likely to intensify too.

A tough global regime

The rules of the game in finance and banking have changed significantly in the past five years, with some of the most drastic measures coming into force this year.

The set of international banking rules known as the Basel III framework took effect at the start of the year, although they will be progressively phased in until 2019.

Among other things, the framework calls on banks to hold more and better quality capital and to better manage their risks.

Banks have been preparing for the past several years to get ready for this framework and 2014 will see them gearing up for more of the progressive new rules to be introduced, said Mr James Stewart, general manager at the Asia-Pacific compliance division of Wolters Kluwer Financial Services.

Starting from 2015, banks will have to submit regular reports on their liquidity coverage ratio - the amount of liquid assets, such as cash, that they hold in order to meet short-term obligations.

Simple as it may sound, the Basel III framework calls for specific classifications of various assets and banks will need to build up their knowledge and IT systems to be able to generate these reports properly, and so most banks will spend a significant part of 2014 gearing up for this, Mr Stewart said.

"Banks have typically struggled to get all this information in one place so they still have a lot of work to do to prepare. They are building up their IT infrastructure and knowledge, training their compliance staff to understand the requirements and working to understand the business implications of these rules."

Another key feature of 2013 was the "fierce activism" by regulators. They went after banks and levied massive fines for product mis-selling, breaches of anti-money laundering controls and international sanctions and colluding in the fixing of the London Interbank Offered Rate, a benchmark interest rate.

PwC Singapore's financial services risk leader, Mr Chris Matten, told The Straits Times: "The global probe into the foreign exchange market has only recently got under way, and we are likely to see further fines."

There will likely be a wave of civil lawsuits on the back of these regulatory actions as bank customers seek to argue that they lost money as a result of alleged misbehaviour, he added.

"We obviously do not know whether they will succeed or not, but one thing is clear - it is going to be another stressful and busy year for the legal and compliance department."

A robust system at home

The Monetary Authority of Singapore (MAS) introduced a series of new rules that affected a wide spectrum of banking operations this year, from loans issuance to the setting of inter-bank lending rates.

A year-long investigation that ended in June found 133 traders from 20 banks had been involved in trying to rig a Singapore benchmark interest rate.

The MAS proposed making such actions a crime and said it intends to regulate the activities related to the setting of the key financial benchmarks, the Singapore Interbank Offered Rate (Sibor), the Swap Offered Rate (SOR) and foreign exchange levels.

The Government also stepped up legislation against tax evasion, announcing in May that it would soon no longer need a court order to obtain bank and trust information to help other countries catch their tax cheats.

Then in July, a law that designates tax crimes as money laundering predicate offences took effect. A money laundering predicate offence, such as corruption or bribery, is the underlying criminal activity that results in "dirty" money that might then be laundered.

And last month, the MAS issued a consultation paper seeking feedback on proposed changes to the Banking Act which will "enhance its supervisory powers over banks and their directors, executive officers and external auditors". The regulator said it is working to implement all the proposed changes to the Act before the end of next year.

Such regulatory pressures will intensify competition in the banking market, said Deloitte Singapore's financial services industry leader, Mr Ho Kok Yong.

"Which customers banks want to serve, what businesses they want to do, these will all have to be reviewed," he said.

"We have seen consolidation in the United States among small banks and we also see more non-bank entities coming into the traditional banking space because they're not hindered by regulations."

United Overseas Bank's head of investor relations, Mr Jimmy Koh, added that the stiffer competition means banks will, more than ever, have to identify the businesses they are strong in.

"Singapore banks are not big globally, so our strength is in becoming regional banks. How do we capture a slice of the growing intra-regional trade? It's one thing to talk about it and another to operationalise it."

Using technology safely

Banks tend to be among the first movers when it comes to adopting new technology and this will continue to be the case next year as they strive to maintain market share, experts said.

However, in the light of high-profile cases of breaches around the world, cyber security is also likely to be a bigger focus.

Mr Leong Kok Keong, KPMG Singapore's head of financial services, believes that in the next five years and beyond, banks must undergo a profound change in the way they think about corporate behaviour, product development, customer relationships, reputation management and more.

"Social media, digital marketing as well as data analytics are likely to be one of the megatrends."

But PwC Singapore's financial services and risk assurance partner, Mr Mark Jansen, noted that the number of global hacking incidents and other cybercrimes doubled in 2013 from two years ago.

Standard Chartered Bank in Singapore revealed recently that the February bank statements of 647 of its private banking clients had been stolen from a server at Fuji Xerox, which the bank had hired to print the statements.

"2013 is hopefully a year of awakening," said Mr Jansen. "A recognition that all organisations need to be vigilant on both their IT security and the processes, governance and strategy around this."

Getting a grip on debt

As early as January, the MAS introduced home loan curbs that capped the mortgage servicing ratio for loans granted by banks at 30 per cent of a borrower's gross monthly income.

This was followed in June by the total debt servicing ratio, which capped a borrower's total monthly debt repayment at no more than 60 per cent of gross monthly income.

These moves, while helping to cool the red-hot property market, also had the broader aim of keeping Singapore's household debt in check.

The MAS warned this year that 5 per cent to 10 per cent of Singaporean mortgage holders were overstretching themselves, with MAS managing director Ravi Menon adding: "When interest rates rise, long before any bank gets into trouble, some households will."

Now that the US Federal Reserve has announced that it will start tapering its stimulus programme next month, a rise in interest rates is likely to follow in the months to come.

Given these developments, StanChart chief executive Ray Ferguson said the Government's moves came in good time: "For banks, these changes have had an impact on volumes and they contribute to the complexities of doing business.

"However, they are all well intended, aimed at enabling consumers to make better borrowing decisions, and hence cushioning the potential impact on them when interest rates eventually go up."

Opportunities ahead

Despite the many challenges that banks will face in the years ahead, opportunities still remain.

Ernst & Young's Asean financial services market leader, Mr Liew Nam Soon, noted that global economic forces are gradually becoming more benign for banks.

"The Fed tapering will push up rates and has a positive impact on net interest margins. China, at the same time, should still present market opportunities - the Shanghai free trade zone, as well as local banks expanding their presence in the market."

A DBS spokesman added: "For DBS, a rise in interest rates, albeit a gradual one, will lift our net interest income which will help mitigate the higher credit costs from a rise in interest rates."

Citibank Singapore chief executive Han Kwee Juan said global trends such as urbanisation will present further growth opportunities for banks.

"More and more people are moving into cities and every year the share of gross domestic product produced in urban centres grows. This concentration of population has led to consumers demanding convenience of services in places where they work, live and play."

Rising incomes in Asia is another trend that will continue to drive business, added OCBC Bank's head of premier banking, Mr Dennis Tan.

"As the ranks of the affluent swell rapidly in Asia, OCBC Bank sees wealth management as a key growth pillar for the consumer banking business in Singapore, and our core markets which include Greater China, Malaysia and Indonesia."