SINGAPORE: Singapore banks are expected to report mild improvements in profitability for the second quarter, during the upcoming earnings season. Banking analysts have said that while rising interest rates are likely to boost loan margins, interest income may be hurt by higher credit costs and slower loans growth.
Singapore's benchmark lending rate has doubled since the start of this year. The Singapore Interbank Offered Rate (SIBOR) is currently at 0.82 per cent, up from 0.4 per cent at the end of 2014. Industry observers said this should benefit the banks' bottomlines for the second quarter as they reprice their SIBOR-based interest earning assets.
However, they also cautioned that this could be offset by higher credit costs and slower loans growth.
Mr Ivan Tan, director of financial services ratings at Standard and Poor's, explained: "The cost of funding or deposit costs have gone up as well. Most of the Singapore banks have launched fixed deposit campaigns in the first half of this year so that will partially offset some of the interest margins uplift.
“Asset quality might deteriorate as well because the borrowing burden on the borrowers increases so the credit cost might increase marginally. So while the lending income will benefit, the higher cost of funds combined with higher credit costs will offset some of this upside.
“And if you combine that with lower loans growth, which accounts for majority of the revenue of the bank, my view is profitability will largely be stable this quarter."
The banks are projecting loans growth of middle to high single digit levels for 2015, which is a marked slowdown from the 12 per cent annual growth in the past three years.
Despite recent market volatility, banking analysts said Singapore lenders are likely to remain resilient, particularly because they are well-capitalised, and direct exposure to Greece's debt and China's stock market declines is limited.
"Singapore banks are well-capitalised. We never had collateralised debt obligations or swap with Greece, Italy, Portugal or any one of these systemically unstable countries," said Mr Cyrus Daruwala, managing director of IDC Financial Insights.
“China is a different story. All of the three banks are heavily exposed to China. But if you look at the issue in China, brokerages and securities got hit. Not lending. Singapore institutions are not so exposed in the equity part. They are exposed in the banking part and banking is still very robust in China."
Still, the weak market sentiment could indirectly pressure the banks' wealth management and brokerage businesses.
Said Mr Liu Jinshu, lead analyst at Voyage Research: "During the first quarter of 2015, some banks saw quite high growth from fee and commission income. If you look at the stock market in the second quarter, Singapore did not do very well, and towards the end of June, quite a few global markets fell. So the outlook for fee and commission income would be less exciting."
However Mr Tan noted: “Having said that, Singapore banks do have rather diversified sources of fee income, wealth management, bancassurance and cash management, and basically a whole host of fee income business they are pursuing. So the customer-related portion is quite small. It will be a mild negative impact but I am not expecting that to translate to significant P&L reduction for the banks.”
In the first quarter of 2015, all three banks reported net profits that were in line with or beat expectations.
DBS posted record earnings of S$1.27 billion, up by 3 per cent on-year. OCBC booked a net profit of S$993 million, an 11 per cent increase from a year ago, while UOB reported earnings growth of 1.6 per cent to S$801 million.
All three banks will be reporting second-quarter financial results in the last week of July.