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Singapore banks see challenges ahead, slower global growth in 2019

The message for the year ahead is to stay disciplined, have cost-controls, a nimble execution, and prudence.

The fourth quarter earnings results of the top three banks in Singapore concluded on Friday, and the message on the bank’s growth outlook for the year ahead is clear: Cloudy with a chance of storms ahead.

Staying disciplined, having cost-controls, providing nimble execution, and prudence seems to be the message for this year for Singapore's three largest banks DBS, OCBC, and UOB, as seen in their forward-looking statements in their earnings report for the fourth quarter which they released this week.

A part of the message behind the outlook for the year ahead is related to the global trade tensions and a weaker Chinese economy. Trade tensions between the United States and China in the later part of last year had affected markets, driving uncertainty into trade-dependent nations including Singapore.

For the fourth quarter, economic uncertainty and financial market volatility added headwinds to the bank’s performances, but even the turbulence was unable to shake off the growth seen in the banks for DBS and UOB, which posted a 10%, and 7% rise in net profit, respectively.

Meanwhile, OCBC’s insurance arm Great Eastern Holding’s weak earnings plagued the performance for the bank, as it fell by 11% in net profit for the quarter.

Staying disciplined, cost-controls, and prudence the message for 2019

The banks will be focusing internally, on the structural improvements of their businesses to navigate the year ahead.

In the earnings statement, DBS’s chief executive Piyush Gupta said the bank’s shift towards higher-returns businesses, deeper customer relationships and more nimble execution will support the bank 'to navigate the challenges this coming year'.

UOB’s deputy chairman and chief executive Wee Ee Chong said the bank will ‘stay disciplined’ in pursuing a sustainable growth, while maintaining a ‘risk-focused’ approach as global uncertainties persist in 2019.

Mr Samuel Tsien, the chief executive of OCBC chimed a similar view, narrating a ‘disciplined cost control’ and ‘focused strategy’, while it continues to ‘prudently’ expand the bank’s franchise in its key markets.

Going forward, Mr Tsien said the global economic growth is expected to slow on concerns of continued trade and geopolitical tensions, subdued market and investment sentiments and rising policy risks in the advanced economies.

For this year, DBS’ Mr Gupta said he expects a high single-digit income growth on the back of a mid-single-digit loan growth and continued improvement in the bank’s net interest margin (NIM).

But the performance is unlikely to beat the stellar growth seen by DBS last year, with total income up 11% to S$13.2 billion, and NIM up by ten basis points from the previous year’s 1.75% to 1.85%. Return-on-equity rose more than two percentage points to 12.1%, which was the highest in more than a decade.

Substantial exposure to mainland China

Consumption growth in China is expected to weaken further this year, amid reports of a weaker retail sales landscape and dwindling auto sales. The country is expected to lower its growth target to between 6% and 6.5% for this year, reports in January had revealed.

According to data from advisory and financial services firm Macquarie Group, the three banks have a substantial exposure to mainland China.

UOB has the least exposure to greater China, which is a term used to group Chinese-speaking countries including mainland China, Hong Kong, and Taiwan.

UOB’s exposure was at 9.5% of total revenue for the first nine months of 2018, compared with 15% to 29% for its peers, a report from financial advisory firm Daiwa in December said. UOB has the largest exposure to Southeast Asia, at 83% of its revenue for the nine-month period.

The lesser exposure to China could be the reason why UOB registered a record net profit for the full year of last year, an 18% gain from a year ago’s S$3.4 billion to S$4.0 billion, supported by strong growth in both net interest and fee and commission income.

This information has been prepared by IG, a trading name of IG Markets Ltd and IG Markets South Africa Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

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