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Singapore banks' earnings may have peaked, to see rising credit costs: Fitch Ratings

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The Big Three banks in Singapore will likely continue to see narrowed net interest margin (NIM), deteriorating asset quality and slowing loan growth, which they had experienced in the third quarter this year.

THE Big Three banks in Singapore will likely continue to see narrowed net interest margin (NIM), deteriorating asset quality and slowing loan growth, which they had experienced in the third quarter this year.

This is according to a Tuesday report by Fitch Ratings, which added that the earnings of DBS, OCBC Bank and United Overseas Bank (UOB) may have peaked in this cycle.

However, their capital and liquidity profiles remain “sound” and should provide adequate buffers, the rating agency noted.

The banks’ results for Q3 ended Sept 30 indicated rising asset-quality risk. For instance, OCBC downgraded two Singapore corporate accounts in the offshore support services and transport sectors. UOB was also affected by some small building construction accounts and one small oil and gas account, all of which were Singapore accounts.

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The credit costs to average loans ratio for the banks remains low, although it increased the most at OCBC, rising to 28 basis points (bps) for the nine months to Sept 2019, versus 12 bps for the whole of 2018.

In 2020, all three lenders are likely to see higher credit costs – the amount set aside for bad loans – according to Fitch. “We see greater vulnerability in Hong Kong SME (small and medium-sized enterprises) loans, with DBS and OCBC having higher exposure than UOB,” it added.

The moderate asset-quality stresses could thus be a drag on the banks’ earnings, moving forward, the rating agency said.

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In terms of their overall exposures to Hong Kong, the Big Three’s impaired-loan ratios in the city rocked by protests are still at less than 1 per cent, although this could worsen if the unrest drags on.

Hong Kong loans constituted around 12-16 per cent of gross loans at the Singapore banks at end-September this year. DBS and OCBC had set aside some pre-emptive provisioning in Q3, but risks could be mitigated by their well-collaterised exposures, Fitch said.

As for NIM, further compression is likely for the three banks, due to the lagged effect of lower rates and continued competitive pricing, according to Fitch. Their NIM had narrowed quarter on quarter for Q3 across the board, after Singapore’s short-term interest rates declined in response to rate cuts in the US.

As at 10.27am on Tuesday, shares of DBS were flat at S$25.65, OCBC was down 0.1 per cent or one Singapore cent to S$10.95, while UOB was up 10 cents or 0.4 per cent to S$26.22.