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Local banks to gain in 2018 from rising rates, loans growth

But they continue to see a deterioration in oil and gas asset quality, says RHB Securities Research

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Rising interest rates and healthy loan growth should boost local bank profits this year, even as concerns linger about their exposure to the troubled oil and gas sector, analysts said.

Singapore

RISING interest rates and healthy loan growth should boost local bank profits this year, even as concerns linger about their exposure to the troubled oil and gas sector, analysts said.

In a report on Friday, RHB Securities Research analyst Leng Seng Choon said the recent spike in the three-month Singapore Interbank Offered Rate (Sibor) should widen net interest margins (NIMs) this year, while loans across the three local lenders - DBS Group, OCBC Bank and United Overseas Bank - are expected to rise steadily.

"The outlook for 2018 loans growth remains bright, with their managements guiding for middle to high single-digit loans growth. Recent activity in residential property en bloc sales is a contributor to loans expansion."

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Strong fourth-quarter GDP numbers could also lead to more investments by corporates in relevant sectors and, correspondingly, to strong loans disbursement, he added.

Still, Mr Leng noted that the three banks' third-quarter results pointed to continued deterioration in oil and gas asset quality.

"We forecast continued rising non-performing loan (NPL) ratios. Although crude oil prices have strengthened over the past few months, managements are of the view that oil and gas support service firms are likely to face pressure from low charter rates and excess systemic capacity. Hence, this segment could see asset quality deterioration."

DBS Group Research analyst Lim Sue Lin said in a note on Thursday however that she expects asset quality issues at UOB and OCBC to have been dealt with by the end of 2017.

On UOB, she wrote: "There would likely be another large NPL classification in 4Q17, this should mark the end of massive asset quality upsets. Further improvement in NIM and more importantly, a pickup in loan growth due to the recovery of the property market should support earnings strongly."

On OCBC, she noted: "Asset quality issues pertaining to the oil and gas segment have been dealt with, and sufficient provisions are said to have been made."

UOB shares will be especially buoyed by the recovery in the property market, she said, as the lender has the largest proportion of property-related loans among the local banks.

OCBC shares, meanwhile, could get a strong re-rating catalyst from a visible recovery of the group's asset quality indicators, and its wealth management and insurance operations, which are holding up well, will remain a key differentiator of growth against its peers, she added.

OCBC shares ended Friday flat at S$12.95, while UOB fell 11 cents to S$26.91 and DBS dropped 18 cents to S$26.32.