Banks lure deposits to build up capital

LOCAL and foreign banks are stepping up their strategies for luring retail deposits in the face of new regulations that demand they hold a higher level of ready capital. The Basel III rules, as they are known, take effect next year and deem that deposits are a preferred source of funding.

They are seen as more stable compared to unsecured wholesale funding, which may be cut at short notice in a liquidity crunch.

The response has been a flurry of bank offers, particularly from foreign institutions, to entice people to deposit their cash.

ICICI Bank, for example, is offering a fixed deposit interest rate of up to 1.65 per cent for 36 months with a minimum deposit of $100,000.

At ANZ bank, a one-year term deposit of more than $150,000 yields up to 1.6 per cent per annum. Analysts believe that foreign banks are looking to pare down their dependence on counter-party borrowing, irrespective of the Basel III requirements.

CIMB head of research Kenneth Ng said: "Traditionally, they depend on the local banks for Singdollar funding but if, for some reason, other banks doubt their credibility, the tap could be switched off, so they are in the market to collect deposits."

Barclays economist Leong Wai Ho added that banks might also be taking the opportunity of low interest rates to lock in and replenish term funding.

He said: "This need probably arose after a solid quarter in terms of house-buying transactions and mortgage lending."

Lending has been outpacing deposits of late with the loan-to-deposit ratio (LDR) of banks in Singapore at 92.7 per cent in August - the highest since 1998, according to a Macquarie report.

The LDR refers to the amount of loans per dollar deposited. A lower number means the bank has funds sitting unused in its vault.

Mr Ng noted that while the race to build up deposits is being spurred by foreign banks, the local institutions have to react to halt a loss of market share.

"The local banks still have excess Singdollar deposits but if you allow too much of a move, you might lose banking relationships as well, in time," he added.

UOB introduced a Wealth Premium Account on Monday for its Wealth Banking customers with a promotional interest rate of up to 1.2 per cent a year for fresh funds.

Ms Gemma Tay, UOB's head of deposits, investments and insurance strategy, said its promotions for selected products will "further augment" its deposit base.

DBS raised fixed deposit interest rates in August but they are still much lower than those offered by foreign banks.

For example, a two-year $100,000 deposit will earn 0.55 per cent per annum, up from the previous 0.125 per cent a year.

DBS chief executive Piyush Gupta said yesterday: "At the margin, the foreign banks compete for the high-cost deposit space because they can't do anything else. We don't have to do that."

He also explained that the higher LDR ratio for DBS is deliberate.

"Three years ago, our LDR in Singapore was 55 per cent. You can't run a good bank with that ratio because what would you do with that money?

"It is part of our strategic agenda to push up our LDR so we can create a good and effective bank, and create returns."

Its Singdollar LDR is about 70 per cent now.

OCBC has not revised its deposit board interest rates recently.

Ms Carmen Chan, its head of deposits, said: "The market has always been competitive. There is strong competition from foreign banks which have been promoting deposit campaigns aggressively.

"But we urge customers to consider carefully the effective interest rates and not just the 'step-up' rates some banks advertise."

songyuan@sph.com.sg