Singapore banks brace for rate impact

Singapore

SINGAPORE banks have flagged muted loan demand amid dour sentiment as they head into the second half of this year, with flattish rates also set to weigh on lending margins.

To be clear, all three banks rose to hit record earnings in the first half, and beat out market estimates in the second quarter, according to respective Bloomberg polls of analysts.

DBS reported a 20 per cent jump in second-quarter net profit to S$1.6 billion from a year ago, OCBC posted a 1 per cent rise in net profit to S$1.22 billion, and UOB saw an 8 per cent growth in quarterly net profit from a year ago to S$1.17 billion.

Shares of the trio closed lower on Friday. DBS closed down 26 Singapore cents to S$26.25, OCBC ended down 21 Singapore cents to S$11.21, and UOB finished 28 Singapore cents lower at S$26.

All three banks are broadly seeing higher contributions from wealth management. Gains in net interest income for the three months ended June 30, 2019 from a year ago reflect the lag in pass-through of higher borrowing rates, with firmer Singapore benchmark rates trailing the earlier upward drift in Fed rates.

Singapore benchmark rates tends to move in tandem with the US Federal Reserve funds rate.

Today, central banks around the world may be striking a more dovish tone amid weakening prospects for economic growth.

The US Federal Reserve cut rates by 25 basis points for the first time since 2008, as a means of "insurance" against risks from a weakening global growth, though as a sign of market jitters, the Fed both had to signal that more rate cuts were coming through to the end of the year, and simultaneously signal that this was not a mark of a very aggressive easing cycle.

Presenting DBS' financial results on the eve of the Fed Reserve's meeting, DBS chief executive Piyush Gupta flagged the rate cuts as the biggest uncertainty for the lender. As it is, Singapore's largest bank still had to battle "a lot of headwinds" in the second quarter, with loans deferred and business confidence affected.

"April and May basically froze", though some pick-up in activity was seen in June, he said at a media briefing this week. Hesaid in a declining interest rate environment and as broader economic growth slows, the bank is unlikely to sustain the current double-digit topline growth ahead.

With that, he also signalled some belt-tightening if further headwinds blow through, though he made clear the bank can manage expenses "without slashing and burning".

Meanwhile, trade tensions between China and US look to be bubbling up again, with the US president saying in a tweet that the US will impose 10 per cent tariffs on another US$300 billion of Chinese goods from Sept 1.

This comes despite the "constructive talks" with the Chinese, he said in the same series of tweets.

A Fitch Solutions report said the latest move suggests that trade tensions are likely to remain high between the US and China over the coming quarters, noting that structural disagreements over issues such as China's industrial subsidies, and intellectual property rights regime would limit scope for a sustainable deal between the two countries.

"With Trump looking to appear tough on China ahead of the US presidential elections in 2020 and increasing bipartisan consensus that China has been a 'bad actor' on trade, there is little room for the US to take a more conciliatory stance."

There have been hopes that companies looking to dance around the tariffs levied on Chinese imports might shift their supply chain over the medium term to Asean.

But OCBC chief Samuel Tsien pointed out that the migration of supply chains to Asean is unlikely to be as significant as expected. Companies that already have established a presence in Asean have increased capacity there. But there have yet to be real investments coming from new companies migrating over, partly as the whole supply chain - such as smaller vendors - has to move along with an anchor company.

He said the labour force in Asean will need to adapt to rapidly changing business models, right down to the different way in which a product is assembled.

"China is very good at that. They're very used to changing business models and adapting their labour force to new business models," said Mr Tsien.

"Trade tariffs have expanded not just between China and US, but also between US and some other Asian countries recently. Companies now have to give more thought, to see if the way to migrate is really to South-east Asia, or they've got other long term plans... perhaps migrating back into the markets in which they sell."

Striking a more upbeat tone, UOB chief executive officer Wee Ee Cheong said the bank will continue to tap Greater China flows coming through to Asean, with Singapore still an attractive hub for the region.

"We still see a healthy business pipeline for the second half of 2019, underpinned by the continued growth of Asean as a region," he told reporters.

"The near-term outlook may be uncertain. But Asia is in a relatively bright spot. Fundamentals are resilient. The region is also expected to benefit from supply chain shifts taking place amid the global trade war."

Separately, Singapore lenders also seem ready to stand against competition heralded by the opening up of digital banking licences, noting that new entrants must avoid predatory pricing.

Mr Gupta said: "What the regulators are very keen on ensuring is that this industry does not go the way of e-commerce, where people endlessly burn money with no profitability objective in sight." - With additional reporting by Natalie Choy

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