Notes

Banking costs incurred due to the increase in interest rates can lead to a loss in profits for the bank. This is because of the gap in the maturity of the bank’s borrowings differ largely from the loans given by banks.

Implications
Fluctuation in interest rates can pose an issue to banks, including DBS both positively or negatively, depending on the magnitude and direction of the change. Although a rise in interest rates are seen as good sight for a bank, there are also some other implications which arise due to it.
More default on loans (high)
In periods of high interest rates, customers who are already holding an existing loan tend to be more unlikely to be able to repay their debt. This additional default to the bank increases the risk that the bank takes on while giving out loans. If the bank is unable to collect the amount of debt which they lent out, the net profit margin of the bank will be largely affected.
Less borrowing / Banks want to lend more (high)
Managing risk
A bank’s primary role is to draw a balance between profits and risk taken. As there is an inverse relationship between the two, banks have to be able to draw a balance by managing risk as well as consistently making profit. If the bank were to give out more loans due to high interest rates, it will result in an intense competition between its competitors in the industry as there is more pressure to lend more. In this case, although there is an increase in the profit margin of banks, their capital buffers would be weakened. Therefore, if a financial crisis would to occur, banks would be more vulnerable due to shortage of capital.
Banks give out previously low interest rate loans will lose out (high)
Net interest margin
If there is a decline in interest rates, borrowing costs would be relatively cheap. This would negatively affect the net interest margin of all banks, including DBS.
On the other hand, if there is a hike in interest rates, interest income earned by floating-rate loans rises. Income earned from short term securities in the bank’s portfolios would also have a positive increase as banks shift to these higher rates.
Since banks typically increase rates for loans faster than deposits, the rise in interest rates would give an immediate boost to earnings.

Analysis and Forecast of Interest rates
As interest rates are an ever-changing factor of the finance industry, there needs to be a solution for the bank to cope with the implications of fluctuating interest rates. The first recommendation is to form a team which functions to monitor the interest rates and the factors which might affect the rates. This understanding of the interest rates would help forecast the movement of local interest rates in the near future.
Whenever there is an event that might affect the interest rates badly, the team can take immediate action and notify the relevant teams to minimise the impact on the bank. For example, when there is a sudden excess of funds in the system, it is expected that interest rates would drop. Therefore, if interest rates were to drop, it would be less beneficial for the bank to give out loans. In this case, it would require them to boost other sources of revenue or to increase the number of loans given out to make up for the loss in income.
This would benefit the bank as it allows the bank to stay ahead of its competition. By being the first to react to such situations, it would provide the bank with ample time to put itself in the most beneficial position according to the situation.
For this idea to take effect, it would require staffs which are very familiar with the interest rate environment in Singapore. This would pose an issue has it is not easy and costly to hire someone with such requirements. However, if there were to be a wrong move done by the bank due to incorrect forecast of the rates, it might in turn harm the company’s profits and increase risk.