Notes

Fluctuation in interest rates
Interest rates are one of the key indicators to the banking industry as it determines pricing for loans as well as the value of money.
Singapore Interbank Offered Rate (SIBOR) is commonly used as a reference rate at which banks offer to lend to other banks in the interbank market. This rate will then be used as a guideline for banks to price their commercial and property loans at a market rate. Since many banks offer housing loans pegged to SIBOR rate, any movement in the rate would cause an impact on their income.
Analysis of SIBOR rate
Since 2007, the SIBOR rate has seen a decline which lasted around 8 years.
As seen in Figure 1, there has been a surge in interest rates since the start of June. This shows that the interest rates are starting to become more volatile and less stable as compared to previous years.
Announcement of Federal
Ever since the announcement of European Central Bank (ECB)’s decision last year to introduce a key interest rate hike, SIBOR rates have been gradually increasing, in anticipation of the future rate hike. However, the European centre bank has been maintaining its rates low at 0.05% for the first half of the year, in attempt to spur economy growth.
In contrast, “Fed chair Janet Yellen has stated that the US central bank will start raising rates, probably as soon as September.” With subsequent decisions by the ECB, speculations on key interest rates would be largely influenced.
As the SIBOR is largely influenced by official interest rates, this would expose the SIBOR to greater volatility.
Weakening of Singapore Dollar
Local interest rates have been gradually increasing due to the weakening of SGD against USD. This is due to the relationship between the EUR and SGD. Since the announcement by the European Central Bank about quantitative easing in Europe along with the election in Greece, the EUR has been depreciating, impacting the rest of the Asian currencies, especially SGD.
Due to MAS’s plans to ease monetary policy, SGD has also been falling since January 2015. This is in line with its plans to stimulate growth in Singapore by increasing the number of exports in the country.
With references to all these factors which might affect the SIBOR rate, it is likely that SIBOR rates would continue to fluctuate.
http://marketrealist.com/2015/05/interest-rates-change-key-indicator-banking-sector/
http://www.tradingeconomics.com/singapore/interest-rate
http://www.straitstimes.com/business/economy/interest-rates-in-singapore-will-rise-in-tandem-with-us-rates-mas
http://www.straitstimes.com/singapore/the-rise-fall-and-rise-again-of-sibor
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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 .. for a bank, there are also some other implications which arise due to the same cause.
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, 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)
Banking costs incurred