WHEN Singapore banks announce their fourth-quarter results this week, they are likely to set aside more provisions against souring assets - as the local lenders are expected to flag risks in not only their current portfolios, but also growth areas like trade finance.
With investors spooked by China's shaky economy and oil prices stubbornly low, Singapore banks are now trading at about crisis levels when compared to book value. Between their one-year peak and trough, the banks' share prices slumped more than 30 per cent, with DBS taking the biggest plunge.
"This we view as a signpost that we are entering a bear market end game, where the market is not only pricing zero growth but also ROE (return on equity) downgrades likely through an expected spike in credit costs," Citi Research analyst Robert Kong cautioned in a report.
Yet, despite the scary calls by funds, analysts are not proclaiming a banking crisis. Non-performing loan (NPL) ratios are low - and they haven't hit 2009 levels, which breached the critical 2 per cent mark. Singapore banks are still well capitalised. Bloomberg data shows DBS and OCBC remain "buy" calls for most analysts.
For UOB, the ratings for its stock are "buy" or "hold".
Analysts noted that since the last global financial crisis, provision and profit growth have not kept pace with loan growth for the local banks - though this also reflects that the loans today are less risky than before. Most of the banks' growth in the last five years was driven by short-term trade loans, as mortgages came under tougher regulation.
Still, given this lag, "sensitivity to rising provision charges for the Singapore banks today is elevated", said a UBS Research note, noting every 10- basis-point (bps) lift in provision charges causes a 6-7 per cent drag on banks' currently expected 2016 earnings.
Citi likewise pointed out that "investors seem uncomfortable with benign asset quality and credit costs guided by Singapore banks management". "Aside from mortgages, loan growth is increasingly corporate. As such, credit costs can stay low for long periods before being hit with 'episodic' NPL formation," it added.
At current prices, the market is pricing provisions - a form of reserve taken against earnings and typically measured as a percentage of all loans - to rise to over 70 bps of loans. This is similar to the level in 2008 but lower than 2009's 132 bps, Citi said. It does not expect capital raising, or a cut in dividends, but noted that the late credit cycle NPLs may temporarily bring quarterly ROEs to under 9 per cent.
CIMB has factored in provisioning levels of 38-65 bps of loans for 2016, despite the banks' guidance of total provisioning at 30-35 bps of loans, said its banking analyst Kenneth Ng.
UBS Wealth Management's Singapore equities analyst Lee Wen-Ching had forecast an increase in Singapore banks' NPL ratio to 1.1 per cent in 2015, and 1.39 per cent in 2016. "We believe that the market would be comfortable with a gradual increase in NPLs, so long as there are no sharp and sudden spikes in them."
Both OCBC and UOB reported for the third quarter higher NPLs due mainly to its oil-and-gas customers. Bad loans at OCBC rose to 0.9 per cent from 0.7 per cent a year ago. The bank said then it had already restructured certain loans. DBS's NPL ratio was unchanged at 0.9 per cent, holding steady for six straight quarters. The bank's stress tests showed at that point that 5 per cent of its portfolio would be affected if oil prices remained low for the next 24 months.
Significant shifts in yuan movement will have an impact, and not just because of its recent depreciation against the greenback. Trade finance should weaken as the arbitrage game between offshore and onshore yuan is no longer attractive to Chinese companies. Banks such as DBS and OCBC had benefited from companies that were taking up financing at better offshore-yuan rates. Today, that trend has reversed, with onshore-yuan rates significantly better than the rates in offshore markets.
DBS chief executive Piyush Gupta said three months ago that the bank would be able to hold its trade book at current levels, but only if there was an "equalisation" of onshore and offshore rates. But Macquarie analyst Thomas Stoegner in a recent report on DBS said: "The RMB arbitrage trade does not work any longer."
CIMB's Mr Ng similarly noted that the volume of Asian trade has come down about 10 per cent, as commodity prices halved. "This has significantly reduced overall loan growth for the banks, and has its associated effects on fees earned," he said.
One piece of good news with trade finance is the "rationalisation" of some competitor behaviour, reducing certain price-driven transactional deals in 2015, said analyst Paul Dowling of East & Partners Asia.
Damage to asset quality from trade finance is unlikely, analysts noted, with CIMB's Mr Ng flagging bigger concerns from long-dated lending in the US dollar for RMB activities.
Data from the Monetary Authority of Singapore (MAS) showed 80 per cent of large firms listed on the Singapore Exchange (SGX) hedge forex risks. But only half of small and medium-sized enterprises (SMEs) do this, making them more vulnerable than their larger peers.
Macquarie estimates that in an adverse scenario, 3.6 per cent of total revenue at DBS could be at risk, reflecting both margin pressures and a fall in trade assets. The bank has a trade finance exposure of about S$50 billion, with trade finance accounting for about 18 per cent of its total loans.
Full-year loan growth for 2015 in Singapore closed at 1.1 per cent - the most sluggish since 2002, dragged down by weak lending for trade, manufacturing, and financing activities. Consumer lending here is growing, but at a slower pace for some two years now. This is due to prudent regulations to ease household leverage in purchases of property and cars, and in the rolling of credit-card debt.
The rise in rates should be a catalyst, since this boosts net interest margins (NIMs) for banks. Singapore's interbank offered rate (Sibor) has more than doubled over 2015, and is now around 1.25 per cent. UBS's Ms Lee expects Sibor to hit 2.2 per cent over a 12-month period. NIMs should expand from 1.72 per cent in 2015 to 1.77 per cent in 2016.
CIMB's Mr Ng has a more muted call, expecting NIMs to rise very gradually by 1-3 bps. "The US Federal Reserve may have its hands tied in consecutive rate hikes, after last December's move and the global stockmarket collapse. However, the strength of the US dollar, as most other countries have continued on the easing path when the US has narrated a tightening path, has seen Sibor creep up," he said. "The downside for Sibor and NIMs lies in the risk that the Fed does an about-turn and goes back to aggressive QE (quantitative easing)."
UOB will release its results on Feb 16, OCBC on Feb 17, and DBS on Feb 22.
INFOGRAPHICS: The current picture