Amid growth concerns worldwide and a looming transition back to normal interest rates in the U.S., the boss of Singapore's Oversea-Chinese Banking (OCBC) is cautious of the credit environment ahead.
"Over the past two to four years, the credit environment has been so good that it is almost abnormal. So as we go back to a more normal credit environment, it is going to be tougher than last year," group CEO Samuel Tsien told CNBC's "Managing Asia."
A recovery in the world's largest economy is paving the way for a lift-off in U.S. interest rates, which many analysts expect to take place in September. With the three-month Singapore interbank offered rate, or SIBOR, closely linked to the U.S. Federal funds rate, that liftoff will likely pull the city-state's lending rates higher as well. The Sibor hit a 6-year high of above 1 percent in March and was at 0.8788 per cent on Thursday.
But even though deposit rates have been rising more slowly, lenders in Singapore may not see a boost in net interest margins this year.
"If everything is equal, a rising interest rate will be good for the net interest margin. However the market that we are in right now isn't equal so there will be less loan demand [and] more competition, which lead to margin pressure," Tsien said.
An improvement in margins may depend on both the U.S. and China, which unfortunately are set on diverging growth paths. While many analysts expect the U.S. economy will likely get back on track within the next 12 months, growth continues to falter in the Asian economic giant.
"As we expect China's growth to be subdued for the next two years, there may be an offset, so strong loan growth [moving forward is unlikely]," he told CNBC.
Meanwhile back home, OCBC is feeling the pressure from a slowing property market as new home loans fall. Tsien said the worst isn't over and volumes of housing loans in the year ahead will likely extend 2014's 40 percent year-on-year slump due to property cooling measures.
Diversification
To minimize risks, OCBC has stepped up its push into non-interest businesses, such as wealth management activities, alongside a string of deals in new growth markets.
It seems to be paying off.
For the first quarter of 2015, OCBC's net profit rose 11 percent to a record-breaking 993 million Singapore dollars ($751 million), beating expectations for 911 million Singapore dollars. Total income, meanwhile, jumped 12 percent to 2.1 billion Singapore dollars.
The results included the consolidation of OCBC Wing Hang Bank from July 2014, which marked the Singapore lender's biggest-ever takeover deal in a bid to tap into Chinese trade flows in and out of Southeast Asia as well as Hong Kong's wealth management market.
In recent years, the Singapore lender has also increased its stake in Chinese commercial lender Bank of Ningbo.
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"We are diversifying into areas which we think are the drivers of future economic activities for this part of the world and that is why we have increased our coverage beyond Singapore, Malaysia and [entered] into Indonesia and Greater China," Tsien said.
Last year, Greater China contributed 12 percent of OCBC's pre-tax profit and that share is expected to rise to 16 percent in 2015. Over a longer period, the chief executive expects the contribution from Greater China to hit 20 percent, surpassing Malaysia as OCBC's second-biggest contributor. Malaysia currently accounts for 19 percent, while more than half of the lender's profit comes from its home market Singapore.
OCBC is also aiming for a bigger slice of the trade finance pie, as trade flows in the region look set to rise with the launch of the ASEAN Economic Community (AEC) this year. The AEC is an ambitious project by the Association of Southeast Asian Nations, which aims to integrate the diverse economies of Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam.
"We would continue to do as much trade finance as possible, because while it is short-term loans extension, there (is) a lot of fee income and foreign exchange income attached to it," he said.
OCBC shares finished little changed at 10.40 Singapore dollars on Thursday.