Banks set to deliver fatter margins in coming quarters

Singapore

WHAT has driven bullish calls on banks is the view that banks would clearly benefit from the rate normalisation process, following a decade of extraordinarily low rates.

With that, eyes are trained on Singapore banks' ability to expand margins further. Loan repricing has kicked in, though banks continue to flag some tightness in the Sing-dollar deposits market. This comes in part as the government-backed Singapore Savings Bonds, and in more recent times, Temasek Holdings, have absorbed some of that cheap liquidity.

To be sure, analysts are shrugging off the short-term pressure.

"We are seeing a pass-through of higher interest rates to net interest margin (NIM) and it should continue to gain traction into 2019. It is a gradual process, which we deem healthy, as it allows borrowers to adjust to higher lending rates," said S&P analyst Ivan Tan.

"Retail bonds such as the recent one from Temasek offer an alternative to bank deposits. They are unlikely to undermine banking system liquidity; retail issuances do not happen frequently and they have longer maturities."

DBS chief executive officer Piyush Gupta noted that the Singapore CASA market has been contracting, even as the bank has kept its Sing-dollar savings account market-share steady at 53 per cent. (CASA is short for current and saving accounts, which are retail deposits that typically incur little interest, compared to fixed deposits.)

Given that higher cost of funds in the retail space would come from fixed deposits, the bank has been "tactical" on raising fixed deposits, Mr Gupta said at the bank's third-quarter results briefing on Monday. In its results, DBS said Sing-dollar fixed deposits accounted for most of the increase in non-bank customer deposits during the quarter.

DBS also expects continued gains in the NIM in both Singapore and Hong Kong. The NIM is a key rate measure of the profitability of loans derived from taking the difference of the interest income generated by banks and the amount of interest paid out to depositors.

Mr Gupta said on top of the repricing of loans in Hong Kong, the bank's gain in deposits in Hong Kong has mainly been from generating higher CASA balances.

DBS reported that third-quarter net profit rose 76 per cent to S$1.41 billion from a year ago. In the third quarter last year, the bank had accelerated allowances for the weak oil-and-gas support service exposure. Net interest income rose 15 per cent to S$2.27 billion.

Its NIM stood at 1.86 per cent, up just one basis point from the second quarter, due mostly to the drag from treasury market activities that reflected a change in swap accounting rules. Its NIM for Q4 is expected at 1.86-1.87 per cent.

UOB reported a dip in its NIM on a quarterly comparison, with NIM at 1.81 per cent in the third quarter, lower than two consecutive quarters.

UOB had said that it was building up deposits in the third quarter "in anticipation of a more challenging environment in Q4". It further said it may see some upside in the fourth quarter in the NIM as the bank disburses loans in a rising rate environment.

UOB posted a 17 per cent increase in net profit for the third quarter to S$1.04 billion, a result that was broadly in line with expectations. The bank's net interest income rose 14 per cent to S$1.6 billion.

Over at OCBC, the bank said its ratio of CASA deposits to total non-bank deposits was 47.5 per cent as at Sept 30, 2018, slightly below 47.7 per cent in the previous quarter.

This reflected some migration of CASA balances to fixed deposits and structured products. These included single-premium products offered by its insurance arm Great Eastern Holdings during the quarter.

OCBC will also continue to enjoy higher margins in the current quarter, and into next year, said Samuel Tsien, OCBC chief executive, during the bank's results briefing. Its NIM rose to 1.72 per cent, up five basis points over the quarter. NIM has been flat the past three quarters as OCBC has not repriced its loans.

Mr Tsien said the NIM will have another slight improvement in Q4 as the repricing of the loan portfolio will have a full-quarter impact. "Our Hong Kong mortgages will also be repriced in the fourth quarter as a result of the increase in the prime rate", he said.

OCBC posted a 12 per cent jump in net profit to a record S$1.25 billion, beating the S$1.13 billion consensus forecast in a Bloomberg survey of seven analysts. Net interest income for the third quarter grew 9 per cent to S$1.51 billion from a year ago.

Banks also see no large impact on broader economic growth from trade tensions, though an overall dour market sentiment has stung treasury and investment banking activities.

All three banks posted tepid performance in the third quarter in non-interest income, which includes fee income linked to trading.

Eugene Tarzimanov, a banking analyst at Moody's Investors Service, said he expects more negative pressure on speculative and volatile income sources, such as trading and investment banking, given the general risk-off sentiment so far.

"But we don't expect much damage to the banks' bottom-line results, because speculative income has historically formed a small share of the banks' total income."

S&P's Mr Tan added that market-based treasury and trading incomes are inherently volatile, but the banks' loan pipeline stays consistent. He expects to see mid-to-high single-digit loans growth from the banks in 2019.

Shares of DBS closed on Monday at S$24, down 2.68 per cent or 66 Singapore cents, amid broad market weakness. Shares of OCBC and UOB likewise traded lower, with OCBC closing at S$11.32, down 15 Singapore cents, and UOB losing 57 Singapore cents to end at S$24.65.

READ MORE: DBS flags more pressure on the mortgage business