AS THE MARKET digests news of ARA Asset Management’s decision to shelve what would have been Singapore’s largest IPO this year, some investors will probably be wondering what the move would mean for business for banks, and ultimately their share price, in the near term.
While interest margins remain depressed, Singapore banks have so far still been able to shore up their bottom line in part by making sure that growth in the non-interest side of their business held up.
But with capital markets turning sour – prompting ARA to pull the plug on the proposed Singapore listing of its China-focused Dynasty REIT – sustaining the growth of income derived from fee- and commission-based activities is becoming more of a challenge.
The three Singapore banks will be reporting their 3Q2012 results in early November. While non-interest income might still have held up between July and September, the momentum may change in the current quarter.
For now, analysts expect the banks to turn in weaker-than-expected earnings for 3Q2012. Net interest income would have declined, they figure, as loan growth slowed and costs of funds rose as competition for deposits increased.
According to Barclays Equity Research, looser liquidity conditions globally, increased fund flows into Asia, and slowing corporate loan demand would have hit loan growth and margins. It expects earnings to decline 4%-6% q-o-q.
“Singapore banks’ funding advantage, which previously enabled them to win [in] regional and domestic loan markets, is becoming a near-term drag on profitability as their loan-to-deposit ratio begins to fall,” says Barclays. “Moreover, we see signs of loan and deposit pricing pressure due to competition driven by the foreign banks.”
Citigroup paints a similar picture. “A year ago, we were hoping to call the bottom of the banks’ net interest margin cycle. Today, loan/asset yield pressure and rising funding costs may take 3Q margins to new lows.”
Barclays favours DBS Group Holdings the least, partly as the bank has the biggest exposure to Greater China, which accounts for about a third of its total loans.
The Chinese central bank’s rate cuts in June and July, rising offshore renminbi deposit costs in Hong Kong, and reduced demand for corporate and trade loans would have weighed on DBS’ bottom line, says Barclays.
Its top pick is United Overseas Bank, which it believes will continue to benefit from its extensive footprint in Southeast Asia, where economic growth generally remains strong.
Oversea-Chinese Banking Corp’s 3Q2012 bottom line is expected to have been boosted by a one-time gain of $1.15 billion from the sale of its stakes in Asia Pacific Breweries and Fraser and Neave in July.
Without the divestment, OCBC’s earnings could still have been supported by its non-interest income, according to Citigroup. “Benign 3Q liquidity conditions and flattening yield curves should have given a lift to net trading income as well as to the non-participating fund performance in the life insurance business. Wealth management should have had a better quarter, in-line with rising equity markets.”
DBS reports its results on Nov 1, followed by UOB on Nov 7 and OCBC on Nov 9. Based on its current stock price, DBS trades at 1.14 times its book value as at June 30. OCBC trades at 1.26 times while UOB trades at 1.35 times.
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