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Singaporean banks may see modest earnings recovery in 2021 – analysts

Banking Essentials Newsletter December Edition Part 2

Banking Essentials Newsletter - November Edition

University Essentials | COVID-19 Economic Outlook in Banking: Rates and Long-Term Expectations: Q&A with the Experts

Estimating Credit Losses Under COVID-19 and the Post-Crisis Recovery

Singaporean banks may see modest earnings recovery in 2021 – analysts

Earnings at Singaporean banks may start to recover from the pandemic in 2021, although the pace will likely be limited by continued margin pressure amid an uneven economic growth outlook, analysts say.

Net profits at three Singapore-listed local banks have been under pressure this year due to falling interest rates and rising allowances for potential bad loans. In the third quarter, DBS Group Holdings Ltd. posted a 20% year-on-year decline in net profit, while Oversea-Chinese Banking Corp. Ltd. reported a 12% fall and United Overseas Bank Ltd. posted a 40% drop.

Low interest rates, weak noninterest income, and high allowances are a "triple threat" to the banks in the city-state, as higher credit costs from reserve-building exacerbated weakness in earnings as a result of the pandemic, according to Tay Wee Kuang, a research analyst at Phillip Securities Research.

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"We will definitely see earnings recovery in 2021, albeit at a slow pace, and only reach pre-COVID level by 2022, with the potential upgrade of asset quality as a catalyst for earnings growth as the regional economy swings back into action," Tay told S&P Global Market Intelligence.

The Singaporean economy has shown signs of recovery. On Nov. 23, the Singaporean government revised its 2020 outlook upward, projecting the economy to contract by 6.0% to 6.5% in 2020, after the economy contracted less than expected in the third quarter. The government also estimates a 4.0% to 6.0% economic expansion for 2021.

Despite the profit dip, noninterest income was a bright spot for the Singaporean banks in the third quarter, as the earnings reports showed that the lenders were charging higher wealth management fees.

In the three months ended Sept. 30, DBS' fee income increased by 17%, in which wealth management clients made up 41.6% of the fees. OCBC's fee income rose 14% compared to the previous quarter, while UOB's grew 15%.

Lower capital needs

Another reason for optimism is that the banks had front-loaded allowances in the first half of 2020 as buffer for bad loans. The lenders will likely report lower provisions in 2021, allowing for earnings recovery or even write-backs, which may lead to lower credit costs in 2021, analysts said.

"Asset quality is not worsening, and ample general provisions and macro overlays taken in 2020 across the sector are sufficient to cover impending [nonperforming asset] formation," Andrea Choong, an analyst at CGS-CIMB, wrote in a Nov. 7 research note.

The three banks posted slower increases in total reserves coverage in the September quarter. The allowance coverage ratio at DBS as of Sept. 30 was 107%, compared with 106% at the end of the previous quarter. Including collaterals, the coverage stood at 200%, DBS said in its Nov. 5 earnings statement. OCBC's total NPA coverage ratio increased to 109% at the end of the third quarter, from 101% three months prior, while that for UOB rose to 111% from 96%, according to the lenders' results statements.

DBS also increased its allowance coverage to nearly twice its bad loans at 199% as at June 30 after taking collaterals into account, and UOB's coverage was at 230%. OCBC also increased its unsecured nonperforming asset coverage to 284%. The buffer may leave room for some write-backs of provisions later, analysts said.

The central bank's 60% cap for the banks' dividend payouts this year, announced in July, is still in effect in order to force lenders to conserve capital.

"The robust capital buffers underline our expectations of a return of dividend payouts to pre-COVID levels when the [Monetary Authority of Singapore]'s cap on dividends is lifted," she wrote in the note. "We do not expect an extension of the cap beyond the current deadline," which is the first quarter of 2021.

DBS, which pays dividends quarterly, declared an interim one-tier tax-exempt of 18 cents per share for the third quarter. OCBC and UOB pay dividends twice a year.

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Margin concern lingers

Net interest margins are expected to stabilize, but unlikely to rebound meaningfully in the near term while the city-state's base rate bottoms out, analysts said.

DBS's net interest margin dropped to 1.53% in the third quarter, from 1.90% in the same quarter of last year and 1.62% in the April-to-June period. UOB's net interest margin in the September quarter was also at 1.53% and OCBC's at a similar 1.54%.

Tay noted that as the economy improves, there may be more deposits outflow and loan growth might improve as a result of a clearer regional economic outlook. The resulting increase in loan-to-deposit ratios may offset some of the impact from low interest rates.

According to S&P Global Market Intelligence data, DBS's net customer loan-to-deposit ratio was at 83.10% as of end-Sept, down from 83.77% in the previous quarter. OCBC's ratio rose to 86.17% from 85.36% while UOB's increased to 86.7% from 85.8% during the same period.

"We expect NIMs to remain under pressure going into [2021]," Choong wrote. "That said, we do not see scope for a rise in margins in the coming year. Any upside to margins could stem from shifts in the yield curve, or when the Fed fund rates start rising again."

As of Nov. 23, US$1 was equivalent to S$1.35.