Singapore banks humming along, but trade woes offer pause

Singapore

SINGAPORE banks appear to be firing on all cylinders in the first quarter of 2018, with loan growth at a healthy clip and much of the bad loans behind them. All three banks are expecting loan growth of just under 10 per cent for the full year.

Analysts are, however, watching developments in trade tensions, amid fears that this could stymie the return of trade flows and dampen economic growth in the quarters ahead.

Indeed, OCBC chief executive officer Samuel Tsien said on Monday that the prospect of a trade war can be "worrisome", and is damaging to the overall economy.

Likewise, Ivan Tan, director of financial services rating at S&P, told The Business Times that one main risk to the performance of Singapore banks this year is that of geopolitical risk leading to a trade war and sharp decline in regional exports, with a negative knock-on impact on the economy and the banks here.

But for now, there is some confidence that the mood has not led to pain. OCBC, for one, noted that such simmering tensions have not affected trade loans flowing through the bank. Mr Tsien told reporters: "I'm more optimistic than what the rhetoric says."

DBS chief executive officer Piyush Gupta similarly noted that the direct impact of any trade war would likely be modest on most sectors.

OCBC was the last of the trio to report its earnings, closing the results season for the banks with a 29 per cent boost in net profit for the first quarter to S$1.11 billion that met expectations based on a Bloomberg poll of analysts.

Mr Tsien noted that there is positive momentum given the current economic backdrop. Loans are up at 10 per cent, and the operating profit for its insurance operations has strengthened. Profit from life assurance - mainly from Great Eastern - jumped to S$166 million from S$49 million in the prior year.

The banks are for now putting behind the issue of bad loans from their exposure to the oil-and-gas segment, having had to set aside allowances for non-performing loans from the offshore support sector in previous quarters.

All three banks posted lower allowances in the first quarter of this year. In the second half of 2017, they had taken advantage of a switch to a new accounting standard that allowed banks to draw down funds from their general provision reserves. The lenders used this to cover large allowances for specific bad loans.

That being said, S&P's Mr Tan flagged a second risk for Singapore banks this year: the possibility of a sharper-then-expected hike in interest rates versus S&P's base case of four 25-basis-point increase in the Fed rate. That scenario would lead to a higher chance of higher default risks among indebted borrowers who are on the fringe, said Mr Tan.

But DBS's Mr Gupta told analysts that the corporate client segment remains robust and resilient, noting that the client selection at the top-end of the market is good. Delinquencies should go up in the SME lending space, but that is unlikely to "fall off a cliff", said Mr Gupta, according to the transcript of the meeting with analysts as posted by the bank.

DBS posted a first-quarter net profit that rose 21 per cent to S$1.5 billion, as it gained from higher interest rates and loans growth as well as a property sale gain in Hong Kong. Mr Gupta said the bank is on track to post a net interest margin of at least 1.85 per cent for the full year.

Its peer UOB posted as well a 21 per cent increase in net profit to S$978 million, on the back of higher net interest margin and a substantial drop in bad debt charges.

Shares of DBS closed at S$28.97 on Monday, up 17 Singapore cents or 0.59 per cent, while that of UOB gained 22 Singapore cents or 0.76 per cent to S$29.29. OCBC bucked the trend, with the stock falling 3.5 per cent, or 48 Singapore cents, to end at S$13.17.

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