Thinner interest margins, worsening assets, slowing loans weighing on Singapore banks

Wed, Nov 27, 2019

FIONA LAM


SINGAPORE banks are likely to continue seeing compressed net interest margins (NIMs), deteriorating asset quality and slowing loan growth, all of which they experienced in the third quarter this year.

This is according to a Tuesday report by Fitch Ratings, which noted that the earnings of DBS Group Holdings, OCBC Bank and United Overseas Bank (UOB) may have peaked in this cycle.

However, their sound capital profiles and comfortable liquidity positions should provide adequate buffers, the rating agency acknowledged.

The banks' results for Q3 ended Sept 30 indicated rising asset-quality risk. For instance, OCBC downgraded two Singapore corporate accounts in the offshore support services and transport sectors. UOB was affected by some small building construction accounts and one small oil and gas account, all of which were Singapore accounts.

The credit costs to average loans ratio for the banks remains low, although OCBC saw the strongest increase, rising to 28 basis points (bps) for the nine months to Sept 2019, versus 12 bps for the whole of 2018.

For 2020, all three lenders are likely to see higher credit costs - the amount set aside for bad loans - according to Fitch.

"We see greater vulnerability in Hong Kong SME (small and medium-sized enterprises) loans, with DBS and OCBC having higher exposure than UOB," Fitch added.

The moderate asset-quality stresses could thus be a drag on the banks' earnings moving forward, the rating agency said.

In terms of overall exposure to Hong Kong, the banks' impaired-loan ratios in the city rocked by violent protests are still at less than 1 per cent, although this could worsen if the unrest drags on.

Citi analyst Robert Kong, likewise, flagged risks which he described as the "Hong Kong quandary" in a note this month, in lowering his 2020 profit forecasts for the Singapore banks.

Hong Kong loans made up 12-16 per cent of gross loans at the Singapore banks at end-September. DBS and OCBC had set aside some pre-emptive provisioning in Q3, but risks could be mitigated by their well-collaterised exposures, Fitch said.

As for NIMs, a further weakening is likely due to the lagged effect of lower rates and continued competitive pricing, according to Fitch. NIMs are a key gauge of profitability for banks, measuring the net difference between income earned from loans and interest paid to depositors.

For Q3, the Singapore banks reported a narrowing of NIMs quarter on quarter across the board, after Singapore's short-term interest rates declined in response to US rate cuts.

Both DBS and UOB posted improved earnings for Q3. DBS's net profit climbed 15 per cent from a year ago to S$1.63 billion, while UOB reported an 8 per cent rise to S$1.12 billion. On the other hand, OCBC's net profit fell 6 per cent to S$1.17 billion.

Bank shares were mixed on Tuesday, with DBS rising S$0.10, or 0.4 per cent, to S$25.75. OCBC shed S$0.04, or 0.4 per cent, to S$10.92, while UOB fell S$0.11, or 0.4 per cent, to S$26.01.