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SINGAPORE: Singapore banks have held up relatively well despite going through one of the worst recessions in the country's history.
And while loans growth is expected to remain weak next year, some analysts said Singapore banks could still see strong bottomline growth in 2010.
It was a tough year for DBS Bank. The lender was forced to pay out some S$80 million to settle mis-selling claims in both Singapore and Hong Kong, following the collapse of Lehman Brothers last year.
But market watchers said DBS, along with other Singapore banks, has managed to weather the fallout from the global financial crisis well, even outperforming their expectations.
Alfred Chan, financial institutions analyst, Fitch Ratings, said: "Singapore banks have comfortably been sitting on very high capital buffer. And given the high capital buffer, this just shows that they have the additional weapon, additional armour to ride through this economic downturn.
"And that's why the ratings of the Singapore banks, which is at AA-, continue to be on the stable outlook despite the economic downturn."
Fitch Ratings expects non-performing loans (NPLs) among Singapore banks to come in lower than initially forecast.
For this year, it expects Singapore banks' NPLs to come in at between two and three per cent of total loans portfolio on average, lower than its initial forecast of 3.5 percent.
But others remain cautious. Christine Kuo, senior analyst, Moody's Investors Service, said: "The rise in NPLs have stabilised, but there is still uncertainty due to the unclear sustained economic recovery."
Singapore banks have shown a strong pick-up in earnings in the third quarter of this year, largely due to lower provisions for bad debts.
But going forward, increasing competition from foreign players is expected to put a squeeze on loans growth. And some market watchers, like CIMB, are forecasting that revenue growth for Singapore banks will remain weak at low single digits in 2010.
Still, CIMB expects strong bottomline growth of about 20 per cent next year, boosted by fee income from a likely increase in merger and acquisition (M&A) activity and lower provisions.
Kenneth Ng, research head, CIMB-GK Research, said: "Fee (income) is probably the key driver for topline growth. We probably need to see more cross border (M&A) transactions between corporates happening."
Trevor Kalcic, head of Southeast Asian Equity Research, RBS, said: "In spite of the fact that the overall economy is doing reasonably OK and doing better in fact, we're still booking relatively high or elevated bad debt charges.
"Now, we expect those to actually start normalising in the early part of 2010. And that will be a very important support to profit development for the banks."
For investors looking for investment opportunities, RBS said DBS stands out amongst the three local banks as a good play in 2010, given its current valuations.
DBS is currently trading more than 1.3 times its book value, lower than OCBC and UOB, which are more than 1.5 and 1.8 times respectively.
Mr Kalcic added: "One very clear catalyst would be when interest rates start rising, which we expect to happen in the first half of 2010. What that means is that will provide support for DBS' earnings. It's most geared of the three banks to rising interest rates."
But others, like CIMB, prefer UOB shares. Mr Ng said: "Part of me worries that China is being kept alive by lots of stimulus at this moment. And should the stimulus be pulled back, there could be another wave of SME defaults or bankruptcies and that could hurt DBS.
"The reason why we chose UOB is that we think that the bank had really provided for a lot in 2009 and some of those will be written back in the later part of 2010. And that could help earnings."
CIMB believes UOB is likely to have strong earnings momentum heading into 2010. This will be driven by a write-back of its conservative provisioning over the past four quarters.
CIMB also noted that UOB's key strength is its traction with SME and mass-affluent consumers, which give it higher lending yields than its peers and thereby propping up return on equity.
Singapore bank stocks have had a strong run since the start of 2009. DBS has risen 77 per cent, while OCBC is up 74 per cent and UOB 53 per cent.
- CNA/vm
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