Singapore banks post resilient earnings in 2015

The three local banks met or surpassed analysts’ estimates on Q4 earnings, helped by gains in net interest income (NII).

Singapore Banks
Source: Bloomberg

An improvement in net interest margins (NIM) helped to boost loan yields, which contributed to higher net interest income. The higher NIM was attributed to higher local interest rates which benefitted local assets.

Specifically, the 3-month SIBOR (Singapore Interbank Offer Rate) rate averaged 1.093% in Q4 2015, higher than the average of 0.955% in Q3. Likewise, the 3-month SOR (Singapore Offer Swap) averaged 1.381% in Q4, versus 1.137% in Q3. Strong growth in non-interest income, particularly fee and commission income, also helped supported earnings.

S$ million

UOB

OCBC

DBS

Q4 net income

788

960

1,000

Estimate

788

877

965

Source: Bloomberg

For the whole of 2015, the net income of DBS and OCBC grew 11% and 16% respectively while UOB’s net income declined 1.2% due to significantly higher increase in non-interest expenses at 25%.

Net income (S$ mil)

2011

2012

2013

2014

2015

DBS

3,035

3,809

3,672

4,046

4,454

OCBC

2,312

3,993

2,768

3,842

3,903

UOB

2,327

2,803

3,008

3,249

3,209

Source: Bloomberg

However, the tepid growth in loans and higher credit costs have crimped overall gains in NII. According to the Monetary Authority of Singapore (MAS), loans to the business sector contracted 3.1% YoY in Q4 to S$1079 billion from S$1113 in the same quarter a year ago, and -2.9% from the previous quarter. Meanwhile, consumer loans continued to slow in the fourth quarter, to 2.8% YoY, from 3.4% YoY in Q3.

The outlook for the loan books remains lacklustre. Standard & Poor predicted that we could see slower loan growth in 2016 of between 3 and 5%, from the mid, single-digit growth expected in 2015. Slowing domestic growth as well as weakening overseas loan expansion, partially due to China-led slowdown, meant that any strong pick-up in loan demand is unlikely in the near term. OCBC’s post-earnings management briefing also suggested a challenging environment for banks moving forward.

OCBC CEO Samuel Tsien said that ‘challenging markets will persist in first half of this year’ and ‘OCBC’s loan growth will fall to a low, single-digit rate’.

The global economic slowdown, coupled with the commodity slump, also put pressure on asset quality. The risk of further deterioration in asset quality from worsening environment in the oil and gas sector, has gotten investors and management alike concerned. In fact, this was one of the main reasons why Singapore banking stocks were being sold off so aggressively in recent weeks. Worries that non-performing loans (NPL) could increase in the coming quarters prompted investors to offload banking counters. On a year-to-date basis, DBS fell -18%, OCBC -10%, and UOB -12%. Channel News Asia reported that some analysts believed NPL ratios could rise to as higher as 2% over the next 12-18 months.

NPL ratio

2014

2015

UOB

1.2

1.4

OCBC

0.6

0.9

DBS

0.9

0.9

Source: Bloomberg

Despite the gloomy prospects for bank earnings, IG client sentiments appeared to be quite bullish on Singapore banks, judging from their mostly long positions in the three local banks. As of 22 February, 85-90% of IG clients with position in the banks expect the price to rise.


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