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Headwinds ahead for local banks despite record Q1 profits

All three Singapore banks reported record earnings for the first quarter of 2014, beating analysts' forecasts. That is despite concerns over loans to China and a slowdown in the domestic property market. However, analysts said the earnings momentum may be hard to sustain.

SINGAPORE: Singapore banks are at their most profitable ever, with all three lenders -- DBS, OCBC, and UOB -- reporting record quarterly profits in the first three months of 2014. The performance was broadly due to improving interest rate margins and double-digit loans growth.

But behind the strong bottom lines, analysts said there are headwinds to earnings potential.

Cyrus Daruwala, managing director of Asia Pacific at IDC Financial Insights, said: "Despite the slowdown, they've made a lot of profit from the net income margin. Now that could potentially slow down.

"Whilst trading as well as fee-driven market (income) and private banking is going to grow sustainably, the property-specific loan market is going to shrink. The shrinkage is not dramatic, but still, a three to five per cent slowdown in the market causes an impact."

OCBC said new origination for home loans is down 40 per cent from its peak two years ago.

Meanwhile, DBS said that new home loan applications are down 45 per cent on-year. Despite the slowdown in the property market, DBS said it is still seeing good growth momentum in its key businesses.

It also said that it is gaining market share in the domestic housing loans market.

Piyush Gupta, CEO of DBS Group Holdings, said: "So if you look at our first quarter (results), it's decimals of a percentage point -- but we think we gained about 0.15 percentage points of market share.

"So while the market is slowing, we continue to improve our position. Partly because we can do fixed rate (loans), which the market can't, so 50 per cent of our volume is fixed rate, and that allows us to outgrow the market. Also because of the HDB loans that we do -- the POSB loan which targets the HDB market."

The tougher domestic conditions have made venturing overseas a greater priority for the banks.

Samuel Tsien, group CEO of OCBC Bank, said: "Our presence in Indonesia, Malaysia, Greater China will also become an increasing contributor to our profits going forward.

"Singapore's loan growth... has been lower than that of overseas market, but part of that is also due to lower demand in property sector, which has been less active than before."

Recent acquisitions announced by the banks are seen by analysts as part of their strategy to capture new markets and develop a new customer base. DBS recently bought French lender Societe Generale's Asian private bank, while OCBC has struck a deal to acquire Hong Kong's Wing Hang bank.

Share prices of all three banks rose following the record results announcements. OCBC shares closed at S$9.65 apiece, up 1.9 per cent. DBS gained 0.6 per cent to close at S$16.94, while UOB surged 2.7 per cent to close at S$21.76.

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