Friday, September 30, 2016

Singapore Banks: Part 3: Deposits


A low-cost deposit base is a competitive advantage for a bank.  If the cost of a bank's deposits - both interest and non-interest costs - is less than the AAA corporate bond yield for example, then they could simply buy the bonds and get free money off the spread.

This article gives an example of working through a bank's numbers to determine its cost of deposits.  Unfortunately, we can't do this for Singapore banks because:
  • 30-40% of their income is non-interest income, and we can't really apportion the costs between the segments.
  • And their deposits are in different currencies.  Non-interest costs are broken down between countries, but interest costs are not.
The best we can do is look at their non-interest rate costs, while accepting that some of it accounts for the non-interest income too.  And try to find some proxy for interest costs.

Non Interest Costs

For Singapore dollar deposits, non-interest operating costs as a percentage of deposits were:

In other words, they paid this percentage in non-interest operating costs (e.g.: rent, staff) in Singapore, for their SGD deposits.

No real difference between the banks, but at around 1%, these costs are extremely low.  And remember, this includes the cost of generating the 30-40% of non-interest income1 .

Their costs for deposits in other countries will be higher, since they lack scale.

Interest Costs

None of the banks break down their total interest costs by the different currencies they hold.  We can't just look at the total when dealing with such disparate currencies such as the SGD (interest rate 0.4%) and Malaysian Ringgit (interest rate 3%).

The CASA ratio is the ratio of (current plus savings) accounts to total deposits.  Since current and savings accounts usually have low interest, a higher ratio means a cheaper source of deposits.  

DBS has a consistently higher ratio of deposits from savings and current accounts.


Buffet's "weapons of mass destruction".  Here we compare the notional amounts of all derivatives on the balance sheet to total assets:

DBS stands out.  The large notional amounts are larger than bank's assets. They are not as scary as they seem - when buying or selling futures, its normal to have 10X leverage2.  You are betting/hedging on the change in price, not the absolute price itself.   Still, a couple of things strike me:
  • For all 3 banks the vast majority of their derivatives are for trading, not hedging.3
  • For the derivatives held for trading: for both OCBC and UOB, over 90% of them are OTC4. For DBS around half5 are. If you are trading, shouldn't you be using exchange-traded securities?
The banks' derivative disclosure is too complex for me to understand.  Probably for anyone else too.  But I just use the notional amount divided by total assets to get a rough idea of derivatives exposure.  Not sure if it means anything.

1 But wxcludes allowances & write offs.  
2 And even more for low volatility assets.  
3 From 2015 Annual report footnotes.  For OCBC: around 98% of derivatives are for trading (note 18); UOB does not give the breakdown of derivatives used for trading or hedging, but the amounts in note 37a suggest only a small amount is for hedging. For DBS, over 99% of derivatives are for trading (note 36.2 on p149).  
4 Forwards and swaps are OTC  
5 Not sure if their "FX Contracts" are OTC - if they are, the amount rises to 78%  

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