Banks in Singapore have blamed a flagging trade environment and China’s weak rebound from the Covid-19 pandemic for a dip in trade finance activity in the first half of the year.   

The city-state’s top three lenders all recorded falls in trade finance income amid slumping trade volumes in China – Asia’s growth engine and a bellwether for global trade. Singapore has also seen total goods trade drop by almost 20% year-on-year in May and June, government data shows.   

The decline has caught up with DBS, Singapore’s largest lender, where falling income from its trade finance activities dragged down otherwise strong results in its commercial banking business.   

DBS recorded a S$4bn (US$2.94bn) contraction in trade loans in the second quarter of this year – triggering a 1% overall decline in the bank’s commercial loan book – “as maturing exposures were not replaced due to a general market slowdown and unattractive pricing”, Chng Sok Hui, the bank’s chief financial officer, told reporters earlier this month.  

The decline cancelled out the modest S$1bn growth in trade loans in the first quarter, leading to an overall drop of S$3bn for the first six months of the year.   

The bank’s income from trade tumbled by 11% in the first half of the year to S$345mn, Sok Hui said, with the slide in trade finance lending also driving a broader reduction in transaction service fees.  

Average interest rates on DBS’ trade assets jumped to 5.38% in the first half of 2023 from 1.66% in the same period last year.  

But while elevated interest rates helped lift DBS to a record second quarter profit of S$2.69bn, they also hit the bank’s operations in Hong Kong. Chief executive Piyush Gupta said borrowers in the city have decamped to the Chinese mainland to take advantage of lower rates and a depreciating renminbi.  

“If you are a borrower, you would want to borrow in a depreciating currency,” Gupta said at a media briefing this month. “So it is a mix of both the general slowdown and a shift to the mainland. We saw this impact mostly in trade loans.” 

According to Gupta, DBS’ net interest margin on “high quality” trade loans was around 10 basis points, which “we did not feel was appropriate”, he said. He compared it to a 50 basis point margin on mortgages which he described as “pretty much rock bottom”.   

Singapore’s other major local lenders, Oversea-Chinese Banking Corporation (OCBC) and UOB, also recorded modest declines in trade finance revenue.   

UOB cited “cautious business sentiment and China’s slow economic rebound” for weaker loan and trade-related activities in its group wholesale banking unit, while attributing slower loan, trade and wealth fees in Singapore to “growing macro uncertainties”.  

The lender did not disclose specific information on trade loans but said its net fee and commission income from trade finance dropped by 5% to S$156mn compared to the first six months of 2022.   

At OCBC, net fee and commission income from trade and remittances fell by 9% to S$135mn, although income from other units such as wealth management and brokering saw sharper declines.   

Globally, the outlook for trade is modest, with the World Trade Organization signalling earlier this month that its previous forecast of 1.7% growth in merchandise trade volumes may not be met, citing “stubbornly high inflation and tighter financial conditions” weighing on consumers and investors.   

The organisation’s trade barometer, which seeks to ascertain future growth levels, also slumped earlier this year.   

The glum predictions have been borne out by recent official data showing a lengthening contraction in trade. Chinese exports have fallen for three consecutive months to July, while imports have dropped for five consecutive months, according to official data.  

DBS expects its trade performance to remain subdued for the rest of the year.  

“Macroeconomic conditions will continue to be challenging in the second half of 2023, owing to persistent inflation and the high interest rate environment,” Sriram Muthukrishnan, the head of product management in the bank’s global transaction services group, tells GTR. “However, we expect supply chain finance to remain resilient due to sustained demand for digital trade solutions and general growth in a number of DBS’ Asian markets.” 

The Singaporean banks’ results are broadly in line with the first half earnings unveiled by London-headquartered lenders HSBC and Standard Chartered, which also conduct significant trade finance business in Asia.  

HSBC’s interim 2023 results show that revenue for global trade and receivables finance was down 3% due to “the softer trade cycle”, particularly in Asia.   

“Given that key sectors of the global economy such as trade and manufacturing are underperforming, and the risk of recessions remains, the demand for Chinese exports may also diminish,” the bank said in its results, released on August 1.  

“Global tensions over trade, technology and ideology are manifesting themselves in divergent regulatory standards and compliance regimes, presenting long-term strategic challenges for multinational businesses.” 

Standard Chartered’s half-year report also highlighted mounting geopolitical tensions, singling out the influx of subsidies for green industries – such as the US’ Inflation Reduction Act – as running the risk of “distorting world trade flows and antagonising trading partners”. The lender’s income from trade and working capital was largely flat in the first half of 2023.