Trade tensions roll back into frame for Singapore banks

Singapore

PERHAPS it is more fitting today to say that when US President Donald Trump tweets, the world catches a cold.

And even as the three Singapore banks reported first-quarter results that beat analysts' expectations, they will again have to brace for a potential slowdown in capital and investment flows, as well as souring sentiment, as trade tensions between the United States and China escalate once again.

To be sure, shares of OCBC and UOB closed stronger on Friday, with OCBC up eight Singapore cents to S$11.39, and UOB closing 13 cents higher at S$25.61. But DBS bucked the trend, with its shares closing at S$26.55, down five Singapore cents.

The volatile sentiment today speaks for itself, in more ways than one. A week ago, before 102 characters were unleashed on Twitter by Mr Trump over raising tariffs on certain Chinese goods, DBS chief executive Piyush Gupta signalled that macroeconomic conditions have stabilised.

He spoke during the bank's results briefing, as DBS reported a 9 per cent increase in its Q1 net profit to S$1.65 billion from a year ago, reflecting a stronger net interest margin and growth in non-trade loans.

Mr Gupta noted that in the medium term, DBS can intermediate flows of some businesses moving to this region as part of broader shift in the global supply chain.

"The longer-term issue is obviously on how much the tension goes beyond trade and if it winds up creating other Cold War-like conflicts between a China world versus a non-China world," Mr Gupta told reporters. "From the nature of the dialogue and conversations going on between China and US, it doesn't seem to be headed that way as the dialogue seems to be productive."

Then on Sunday, Mr Trump tweeted that the US will hike tariffs on more than US$200 billion in goods from China. He tweeted: "The Trade Deal with China continues, but too slowly, as they attempt to renegotiate. No!"

The new tariffs are due to be lifted to 25 per cent from 10 per cent, and will be imposed on thousands of consumer goods from China. They take effect at 12.01am Washington time on Friday, and comes after trade talks on Thursday appear to have stalled.

Investors are holding their breath for a last-minute breakthrough in talks.

Citi analysts said in a report that the incremental tariffs would cut China's exports by 2.7 per cent, drag down China's gross domestic product growth by another 50 basis points, and remove another 2.1 million jobs in China in the medium term.

Back in Singapore, OCBC's chief Samuel Tsien on Friday flagged the trade tensions as an event risk at the bank's results briefing. It posted an 11 per cent rise in Q1 net profit to S$1.23 billion from a year ago on broad-based growth.

Mr Tsien said if there is no immediate or early resolution to the trade tensions between US and China, the region will see in the short term "a significant slowdown in the global flow business, including trade and capital flows".

"Consumer sentiment will also be impacted and these days, sentiment is very important in driving economic growth, so these two factors will be unfavourable to economies in this part of the world."

OCBC's Mr Tsien noted further on Friday that there has no noticeable shifts in supply chains for now, with pundits earlier hoping that more manufacturing activities would start shifting into the region.

DBS' Mr Gupta said that in the short term, it is probably unlikely to see any shift in supply chains as it is not that easy to move operations around.

But he maintains that in the medium term, many clients are looking at countries such as Thailand, Malaysia, Vietnam, Indonesia and India, to make further investments.

UOB did not hold a media briefing for its Q1 results. But in a statement, UOB's chief executive officer Wee Ee Cheong had said that the "macro environment remains uncertain due to the slowing global economy and ongoing trade tensions".

UOB reported an 8 per cent rise in Q1 net profit for its first quarter of 2019, to S$1.05 billion.

Citi analysts said they expect both China and the US to still look to resume trade talks before the tariffs are actually implemented, "as the uncertainty effect from the additional tariffs starts weighing on the world's two largest economies, but also on the global economy".

"We are still cautiously optimistic a trade deal can eventually be signed."

The broader macroeconomic uncertainty may also show up more in bank earnings, as the updated accounting model used by banks to assess expected credit loss now reflects a certain amount of procyclicality.

Mr Gupta noted that the model today for assessing expected credit loss reflects a prediction of economic cycles, with the bank's portfolio performance measured against that.

Still, OCBC's chief financial officer Darren Tan pointed out that there are several other macroeconomic factors that go into the model.

"Fortunately, a Trump tweet is only one factor in the global economic environment," he said.

The Singapore banks also flagged the weakening demand for housing loans across the board, with all three banks reporting flat growth or contraction in housing loans in the first quarter of 2019, when compared with the fourth quarter of 2018.