The pain for Singapore’s lenders is set to persist as the city-state braces for a sharp economic contraction this year thanks to the pandemic that’s crippling manufacturing, tourism and other services. Banks are also contending with falling interest rates and slowing loan growth, and the crash in oil prices may trigger defaults among local firms that cater to the energy sector.
“Banks always tend to do badly in the midst of an economic recession,” said Min Lan Tan, head of the Asia-Pacific chief investment office at UBS Global Wealth Management. The slumping economy will fuel bad loans, squeeze interest margins and slow credit growth, she said.
OCBC and United Overseas Bank Ltd. will report next week. The last time the trio all posted a profit retreat was in the final quarter of 2016, when many energy-related firms defaulted in the aftermath of an earlier oil slump.
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Asset Quality
- Analysts are predicting a sharp jump in credit costs due to the banks’ exposure to the oil, gas and commodities sector and loans to small and midsized companies.
- The banks had combined exposure of US$680 million to Hin Leong Trading (Pte) Ltd., the Singapore oil trader that filed for court protection from creditors this month, as of April 9. It’s not clear whether the local lenders will have provisioned against Hin Leong by the end of March.
- DBS may have booked a loan-loss buffer of $640 million in the quarter, up from $76 million a year ago, according to Morgan Stanley analysts. They see OCBC’s provisions swelling 81% to $451 million, and UOB’s more than tripling to $380 million.
- Jefferies analyst Krishna Guha expects the banks to book credit costs of 60 to 100 basis points and said guidance will be “crucial” to understanding the cost trajectory this year.
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Loan Growth and Margins
- Analysts expect single-digit declines in net interest margins this quarter, but said loans will be supported by larger companies drawing on commitment lines and banks providing short-term U.S. dollar liquidity in March.
- Net interest margins probably shrank only slightly in the quarter because the U.S. Federal Reserve’s interest-rate cut came late in the period, Citigroup Inc. analyst Robert Kong said in a note.
Dividends
- The banks are expected to give guidance on this year’s dividends, with UBS Securities saying cuts are more likely for DBS and UOB than OCBC.
- OCBC has “more headroom” to maintain dividends given its higher capital levels and lower current payout ratio, Sanford C Bernstein’s Kevin Kwek wrote in a note.
- Analysts estimate dividend yield for all three banks to remain between 4% and 7% in 2020 even after earnings decline, supported by Tier-1 capital ratios exceeding 14%.
