Boring isn't better this time for Singapore's banks: Gadfly commentary

[SINGAPORE] Are Singapore's banks turning boring again? Probably, yes. Are they making the slide into tedium worthwhile for shareholders? Maybe not.

Before the onset of the subprime crisis in the US, the three homegrown Singapore lenders - DBS, Overseas-Chinese Banking Corp and United Overseas Bank - used to earn a humdrum 13 per cent return on equity, compared with of 25 per cent for large banks in Hong Kong, 20 per cent in Australia and 19 per cent in the UK.

Then the tables turned. While global banks had to load up on capital and drive down shareholder returns to bolster their balance sheets, strongly capitalized lenders in the Asian city-state found a great opportunity to finance China's credit bubble, as well as a red-hot property market at home.

Returns on equity of the trio last year were almost double HSBC's, and approaching six times the level for UK banks as a group.

The exciting times couldn't have lasted forever, and a strong indication that they are finally over came Friday morning when OCBC disclosed that its core ROE slid from 13.2 per cent at the end of first quarter of 2015 to just 10.1 per cent.

A day earlier, UOB, the smallest of the three, announced a return on equity of 10.2 per cent. DBS, the largest, will report its earnings next week, and at least one analyst is expecting a measly 10.07 per cent ROE.

Even that 10 per cent floor might not hold for long. Trade financing is in the doldrums. Singapore's rig builders are starved of new orders, while the city's property market is slip-sliding away because of a glut of homes and offices in a weak economy.

Meanwhile, credit costs on loans to Chinese borrowers can only increase. And amid all the chatter about how China's ICBC managed to avoid a drop in quarterly profit only by thinning down provisions for bad debt, don't forget the Singaporeans: OCBC says its total allowances are 113 per cent of nonperforming loans, down from 166 per cent in March last year.

The city-state's banks boast strong capital positions, meaning they can ride out bad times without dizzying investors with anxiety. But a single-digit ROE is too great a sacrifice to achieve a fortress-like balance sheet. The onus is on the lenders to show that they're prepared to take a hatchet to operating expenses - especially wage bills - to juice up returns. Otherwise, for shareholders, the price of boredom may not be worth paying.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

BLOOMBERG