Most of us would know that interest rates have been climbing steadily in recent months. We would also have read about the reason – stubbornly high inflation, which has forced the U.S. Federal Reserve to hike interest rates at an unprecedented rate.
Given the heightened interest rate environment, we tried to find out what it would take for our CPF interest rates to increase in Singapore. While writing the article, we highlighted the fact that the three local banks in Singapore – DBS, OCBC and UOB – have a responsibility to Singaporeans to ensure they are paying a fair interest rate on their Fixed Deposits (FD) and Savings Accounts.
This is because our CPF Ordinary Account interest rates are actually determined by the following formula: 80% : 20% fixed deposit to savings rate of preceding 3-month average of major local banks’ interest rates.
What Is The Fixed Deposit Rate In Singapore Currently?
A quick look at the fixed deposit rate of three local banks in Singapore shows us that they are still at depressed levels.
|Banks||12-Month Fixed Deposit Interest Rate|
|DBS||1.15% (for $1,000 to $19,999)
0.05% (for $20,000 and above)
Even though DBS is offering 1.15% for its interest rate, we need to look deeper – to the fact that it is only up to about $20,000. For amounts above this, DBS is paying 0.05%, which is even lower than OCBC and UOB. Looking at the current interest rates, it would not be surprising that the local banks have not risen interest rates at all, since pre-COVID-19.
This means, if we put $1,000 into a fixed deposit with OCBC (chosen only because they pay in between what DBS and UOB pays), we receive $1 each year. To be honest, we wanted to compare this with the inflation rate, but surely anyone would realise that this cannot beat the rate of inflation today, or even in the recent past.
We also looked at a selection of full banks in Singapore – and what they are offering on their fixed deposits or time deposits.
|Banks||12-Month Fixed Deposit Interest Rate|
|HSBC||2.30% (promotional rate)|
|Standard Chartered||2.20% (promotional rate)|
From the four banks we chose to look at, we can see that certain banks only provided their promotional rate, while others provided their board rates. For those that displayed their board rates, they were not very far off from the local banks’ board rates. Hence, we cannot really say that the local banks are not giving a competitive rate.
Of course, the next question to ask, is if the local banks are also offering promotional rates. The answer is yes. OCBC is paying a promotional rate of 1.9% for its 12-month Fixed Deposits, and UOB is paying a promotional rate of 1.6% and 2.3% for its 10-month and 15-month Fixed Deposits. We could not find any promotions on DBS Fixed Deposits.
This simply shows that there is an appetite for certain banks to pay higher rates on fixed deposits right now.
The “Risk-Free” Rate Is Higher Than The 12-Month Fixed Deposit Rate?!
This goes to show that the local banks are not paying a base interest rate that is lower than the other banks in Singapore. However, we cannot simply turn a blind eye to promotional rates – they are an example of what the market is willing to pay too.
This line of thinking is also not too far removed from reality. The risk-free rate for locking up our funds for 12 months is 2.6%. For context, the latest September 2022 issue of Singapore Savings Bonds (SSB) is paying 2.63% for those who hold their savings for 12 months, and the most recent 6-month Treasury bill issued on 4 August 2022 paid an average yield of 2.28%.
For anyone who wants to keep $1,000 in the SSB for 12 months, we will receive $26.30. This is far better than what we would get with a bank’s fixed deposit currently.
This also suggests that the Singapore government, one of the few triple-A-rated economies in the world, is paying a higher interest rate than banks for individuals to keep their money with them for 12 months.
Why Are The Banks Paying Us Such A Low Interest Rate?
One way to think about the situation is that the interest rates that banks are willing to pay reflect their need to attract more funds or keep existing funds with them. As seen with the depressed rates on offer by the banks, a logical conclusion is that banks in Singapore are not really worried about having funds.
Banks Still Have A Healthy Cash Pile today. We can simply look at the local banks’ financial statements to see how this works. For example, DBS reported that they have $528 billion of customer deposits in 1H2022. This was 9% more compared to 1H2021, and 5% more than 2H2021. Compared to pre-COVID-19, DBS has 19% more deposits today than the $445 billion back in 1Q2020. We can safely say that DBS is not short of deposits.
Another reason that banks need to attract more funds (and pay a more competitive rate to do so), is when they are giving out much more loans. This is a function of how banks earn money – they earn from the difference between the rate they pay depositors and the rate they charge for lending money. In general, the lower their cost of funds, the better their earnings.
This time, we look at UOB’s financial statement to see their loans status. UOB has $321.6 million in gross customer loans in 1H2022. This is 6% higher than gross customer loans in 1H2021 and 2% higher when compared to 2H2021 figures. Crucially, their gross customer loans have increased slower than their gross customer deposits during the same period.
Nevertheless, banks in Singapore (and across the world) cannot escape the fact that safer government securities are offering superior interest rates. Moreover, these government securities may be offering even better terms. On the Singapore Savings Bonds, we can cancel any time without penalties and we can also continue to keep it for 10 years even if interest rates subsequently fall. In the example above, the Treasury bill paying a better 2.28% average return is only 6 months long.
Over time, banks will eventually feel the squeeze, especially if interest rates continue to climb. Even now, we can already see some form of this happening in the form of certain promotional rates on offer.
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