Lim Hng Kiang: The Singapore financial services sector
Address by Mr Lim Hng Kiang, Deputy Chairman of the Monetary Authority of Singapore and Minister
for Trade and Industry, at the ABS Annual Dinner, Singapore, 29 June 2007.
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Chairman, ABS
Council Members of ABS
Ladies and gentlemen
It is good to be here tonight. The ABS Dinner is an excellent opportunity for the Singapore financial
services community to get together, catch up and look ahead.
State of the Singapore financial sector
2006 has been a good year for Singapore. The financial services sector has done particularly well. All
in, financial services grew 9.2% in 2006, outperforming Singapore's overall GDP growth of 7.9%. This
momentum has carried into this year. 2007 first quarter growth for the financial services sector came in
at 13% on a year-on-year basis.
Growth has been broad-based, with brokerage, treasury and advisory-related services being the
largest contributors. Volumes in the Singapore foreign exchange market have also grown steadily. The
equity markets have been hot. Volume of securities traded has gone up sharply.
The local debt market has also registered good growth in 2006. In the latest Annual Corporate Debt
Review for 2006 which MAS released today, the total market capitalization of the Singapore bond
market has reached S$243 billion.
Indeed, the Government's efforts to grow the Singapore Government Securities (SGS) market have
produced results. Since 1996, outstanding SGS has grown from S$20.5 billion to S$85.8 billion in
December 2006. This year we issued the first 20-year SGS. The 20-year SGS has extended the
benchmark yield curve as a price discovery mechanism and liquid hedging instrument for the broader
Singapore debt market.
The corporate debt market has also seen good growth. As at the end of last year, outstanding
corporate debt securities were up 14% from a year earlier. This represents an increase of more than 6
times in size since 1996 to S$157 billion.
Another encouraging development has been an increase in the diversity of issuers. We have seen
more real-estate borrowers and foreign issuers tapping the SGD bond market. Almost one-fourth of
SGD-denominated bond issuance, or S$6 billion, was made up by foreign entity issuers. We have
issuers from the US, Europe and more recently from Korea, Latin America and the Middle East.
In line with the growing sophistication of the investor base, the asset securitization market in
Singapore has also taken off. For 2006, ABS issuance amounted to more than S$19 billion. There is
also an influx of more structured products into our market such as convertibles and synthetic
Collateralized Debt Obligations.
Turning to wealth management, Assets Under Management (AUM) has continued to grow strongly.
2005 was the fifth consecutive year of double-digit growth for Singapore, with AUM increasing 26%.
This trend has continued in 2006, evidenced by the expanding wealth management community in
Singapore. This underscores Singapore's emergence as a wealth management center. Singapore is
strategically placed to capitalize on the significant wealth building up in Asia. At the same time,
increasing interest from international investors to diversify a greater proportion of their portfolios to
Asian assets has created business opportunities for fund managers based in Asia, including
Singapore.
The local banks too registered good financial performance last year. Altogether, their profit grew by
over 40%. Their return on equity also improved by 2-3% points compared to the year before. At the
same time, the local banks have also shown improved financial health. Asset quality has improved
further. Classified loans represented 1.6% of total loans in 2006 compared to 2.2% in 2005. The local
banks remain well capitalized, meeting MAS' regulatory requirements and in comparison with peer
banks internationally.
Taken together, these developments bode well for Singapore's efforts to develop itself as an
international financial center. Barring any unforeseen shocks, 2007 looks to be another good year for
the financial services sector.
Navigating the risks ahead
That said I would be remiss if I did not point out some of the risks on the horizon.
For now, the global environment appears benign with rosy prospects for growth worldwide.
Nevertheless, various uncertainties could quickly unsettle this. For one, it is unclear how the mounting
global imbalances between the East Asian countries and the developed countries will resolve. A sharp
and abrupt adjustment would affect the global economy. It also remains unclear how long the golden
era of good growth coupled with low inflation will continue. Already, fears of inflation have resurfaced.
To complicate matters, we must not forget the geopolitical risks in the Middle East, terrorism and other
surprises.
This year, we have already had several reminders of the risks in the system. The Chinese stock
market has experienced a few incidents of volatility following expectations of and actual government
action. It remains vulnerable to further corrections. In the US, the sub-prime market has imploded.
More recently, US treasuries have come under severe selling pressure, causing interest rates to rise
and generating unease in stock markets.
Nevertheless, the financial system has been resilient so far. Have we learnt our lessons from past
crises and are now better prepared? Or are we just plain lucky? Whichever the answer, we should
remain vigilant.
As bankers, you will be familiar with the saying that bad loans are made in good times. This saying is
particularly worth repeating when the environment appears rosy and serves as a reminder that
vigilance is our constant responsibility. With this in mind, MAS initiated a survey of risk managers and
traders, many of whom are based in Singapore, about their key risk concerns. This poll was conducted
between April and June this year. A roundtable discussion was also held with risk managers. Let me
now share with you some of the findings from this survey.
The feedback received was open and honest and many views were shared. Most respondents
believed that asset prices were frothy and that a big shock could happen. Some speculated that this
could happen before the end of 2008. In this age of increased connectivity and correlation of markets,
respondents felt that a shock event such as a terrorist attack, pandemic or geopolitical instability could
cause market disruptions.
Respondents also highlighted the current liquidity in the financial markets. They observed that
speculative liquidity was circulating in the financial system. This has led to historically unprecedented
pricing and terms. When referring to the new players in the financial markets, respondents spoke of
hedge funds and private equity in the same breath as "highly leveraged", "covenant-lite structures" and
"large speculative positions". In the current low interest rate environment, many yield-hungry investors
have become hedge providers for institutions. Respondents expressed concern about the systemic
risks such providers posed and their default risk in a severe market correction.
In summary, the responses to the survey indicated that there seems to be a heightened level of risk in
the macroeconomic and financial environment. Nevertheless, these responses are encouraging from
another perspective. They indicate that financial institutions are aware of this heightened level of risk.
With acceptance comes preparedness for the risks that may materialize in future.
It is important for banks not to become complacent. As banks pursue the many opportunities that lie
ahead, we must not let our guard down. Banks must not be lulled into a false sense of security by the
external environment's bullishness and resilience to shocks so far. We must not allow ourselves to get
over-confident with our knowledge and analyses of the risks out there. Risks may deviate from
expectations. Situations may take unexpected turns. In the face of such uncertainties, being prepared
and ready is always a good proposition.
Reputation risk and fair dealing with consumers
Moving on from macroeconomic and financial risks to something closer to home, there is another risk
which banks should remain mindful of. Unlike the other risks I had raised earlier, this is a risk which is
fully within your bank's domain. This is reputation risk.
You all appreciate the value of a good reputation in doing business. A good reputation takes years to
build. It can also be damaged within a short period of time through incidents that undermine consumer
confidence and that are not managed properly.
You have read the newspaper articles in recent months concerning public unhappiness and questions
about the transparency and fairness of practices concerning multiple home loan board rates and
promotional fixed deposit rates. You might have asked yourself why these issues should concern you
as they may not pose any significant impact on the financial standings of your banks.
While of limited short term bottom-line impact, these issues can affect the longer term reputation of
and consumer confidence in your banks. The internet has empowered consumers with unprecedented
reach. A disgruntled customer can post his or her unhappiness on a forum or blog and quickly reach a
wide audience. It has become more important for banks to incorporate good and fair consumer
outcomes as integral parts of the way they do business. Banks should pay attention to consumer
feedback for early warnings of potentially larger issues and proactively take steps to address emerging
customer concerns early.
The ABS Code of Consumer Banking Practice is premised on four key principles - fairness,
transparency, accountability and reliability. These principles are a good foundation for building a
trusting and open relationship between customers and their banks. As members of ABS, we
encourage you to uphold and observe these principles. You are best placed to raise standards
through market discipline, industry codes and guidelines.
Together, ABS and banks can do more in monitoring consumer feedback on industry practices and
taking steps to manage consumers' concerns at an earlier stage before they become broader public
issues. For example, ABS could initiate measures to identify emerging issues, conduct research to
better understand consumers' concerns and work with member banks to address them. Individual
banks could also do more by reviewing their customers' feedback, sharing their observations on
concerns regarding industry practices and working with ABS to manage these issues.
MAS will continue to share with the industry our observations from feedback received from members
of the public. We will also continue to work with the industry to encourage best practices by banks,
with the aim of achieving good consumer outcomes. This more collaborative and consultative
approach, we believe, is more desirable than formal and often more prescriptive regulation.
Conclusion
The Singapore financial services sector looks set for another year of good growth. However, as we
look forward to the opportunities before us, we must be aware of the risks that lie ahead. As benign as
the environment may seem, banks must not become complacent. Banks should be prepared for
whatever surprises lie ahead.
At the same time, banks must also safeguard their reputations. More can be done and we look forward
to seeing ABS working with industry in bringing about good and fair consumer outcomes.
On this note, let me wish everyone a good year ahead and a pleasant evening. Thank you.