SINGAPORE: Local banks have delivered robust earnings
for yet another quarter this year. Despite the slowdown in loans growth,
income was largely driven by non-interest components such as fee and
trading income.
Fee-generating businesses like investment banking and wealth management helped to drive non-interest income in all three local banks for the third quarter of this year - fee income for DBS Bank, OCBC Bank and United Overseas Bank gained between 16 and 20 per cent.
Analysts said that has helped to offset some deceleration in loan demand amid Singapore's property slowdown and regional headwinds.
Nonetheless, with the Federal Reserve putting an end to its bond buying programme, interest rates are expected to rise in late 2015. As a result, market watchers said higher net interest margins can offset slower momentum in loan volumes.
Said Kenneth Ng, head of Singapore Research at CIMB: "While there was 7 to 10 per cent loan growth, at least margins are no longer contracting. That helps net interest income a lot. Margins are actually a bigger driver of net interest income, not volume.
"When interest rates rise, because the banks have deposits that tend to be sticky and will not raise the same way as interest rates, while loans will rise as interest rates rise, there is the scope for added margin."
Group CEO of DBS Bank Piyush Gupta said that his outlook for interest income over the next year is "relatively sanguine". "If rates go up by one per cent, we make about S$800 million to our bottom line, so we are very positively correlated to interest rate increases. So our ROE (return on equity) goes up by about a couple of percentage points if rates go up."
RISING COMPETITION AS REGIONAL BANKS CONSOLIDATE
Throughout Asia, market watchers said that competition is rising as regional banks consolidate.
"I would not be surprised if once they are done with consolidation, they may place more effort into regional expansion such as expanding into Singapore or making greater impact on Singapore, so we may face stiffer competition from foreign banks. That is an area I think our banks may want to consider adapting to as well," said Liu Jinshu, lead analyst at Voyage Research.
Some analysts said this would put pressure on Singapore's lenders to expand their regional presence. UOB and OCBC Bank, for example, are making inroads into Myanmar.
"There is a significant amount of investment by Singapore businessmen into Myanmar," said Samuel Tsien, group CEO of OCBC Bank. "So that will be our first target. To make sure that we are able to expand their business in Myanmar with them. We are already banking with them in a way but we are financing through the Singapore company, then they take the money as capital and inject into Myanmar. Going forward, we will be able to bank with them more comprehensively."
Looking ahead, observers warn banks of the potential risk of bad debts, in a higher interest rate environment.
Still, all three banks have kept the ratio of non-performing loans relatively stable. Non-performing loans account for 1.2 per cent of all customer loans for UOB, and these make up less than 1 per cent for both DBS' (0.9 per cent) and OCBC's (0.7 per cent) loan books.
Fee-generating businesses like investment banking and wealth management helped to drive non-interest income in all three local banks for the third quarter of this year - fee income for DBS Bank, OCBC Bank and United Overseas Bank gained between 16 and 20 per cent.
Analysts said that has helped to offset some deceleration in loan demand amid Singapore's property slowdown and regional headwinds.
Nonetheless, with the Federal Reserve putting an end to its bond buying programme, interest rates are expected to rise in late 2015. As a result, market watchers said higher net interest margins can offset slower momentum in loan volumes.
Said Kenneth Ng, head of Singapore Research at CIMB: "While there was 7 to 10 per cent loan growth, at least margins are no longer contracting. That helps net interest income a lot. Margins are actually a bigger driver of net interest income, not volume.
"When interest rates rise, because the banks have deposits that tend to be sticky and will not raise the same way as interest rates, while loans will rise as interest rates rise, there is the scope for added margin."
Group CEO of DBS Bank Piyush Gupta said that his outlook for interest income over the next year is "relatively sanguine". "If rates go up by one per cent, we make about S$800 million to our bottom line, so we are very positively correlated to interest rate increases. So our ROE (return on equity) goes up by about a couple of percentage points if rates go up."
RISING COMPETITION AS REGIONAL BANKS CONSOLIDATE
Throughout Asia, market watchers said that competition is rising as regional banks consolidate.
"I would not be surprised if once they are done with consolidation, they may place more effort into regional expansion such as expanding into Singapore or making greater impact on Singapore, so we may face stiffer competition from foreign banks. That is an area I think our banks may want to consider adapting to as well," said Liu Jinshu, lead analyst at Voyage Research.
Some analysts said this would put pressure on Singapore's lenders to expand their regional presence. UOB and OCBC Bank, for example, are making inroads into Myanmar.
"There is a significant amount of investment by Singapore businessmen into Myanmar," said Samuel Tsien, group CEO of OCBC Bank. "So that will be our first target. To make sure that we are able to expand their business in Myanmar with them. We are already banking with them in a way but we are financing through the Singapore company, then they take the money as capital and inject into Myanmar. Going forward, we will be able to bank with them more comprehensively."
Looking ahead, observers warn banks of the potential risk of bad debts, in a higher interest rate environment.
Still, all three banks have kept the ratio of non-performing loans relatively stable. Non-performing loans account for 1.2 per cent of all customer loans for UOB, and these make up less than 1 per cent for both DBS' (0.9 per cent) and OCBC's (0.7 per cent) loan books.
- CNA/ac
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