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Breakdown: Singapore Banks, Danger On The Horizon?
Breakdown, Tradeable | 13 August 2013
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By: Raymond Leung
Articles (142) Profile

Earlier this month, Singapore banks DBS Group Holdings (DBS), Oversea-Chinese Banking Corporation (OCBC) and United Overseas Bank (UOB) released their earning results for 2Q13 and 1H13. This was the first financial result released by the banks following the downgrade of the sector to negative from stable as a whole by Moody’s Investors Service (Moody’s).

In this article, we shall have a simple breakdown of performance of the various banks. It will be followed by a collation of pointers from Moody’s report coupled with a comparison of the latest quarter against the concerns highlighted by Moody’s in its report.

Performance Of DBS, OCBC & UOB
DBS reported a 5 percent increase in profits for 1H13 and a 10 percent increase in profits for 2Q13 from the same period a year ago. For the quarter, Net Interest Income (NII) increased by 4 percent while net fee and commission income (NFCI) increased 26 percent and other non-interest income was up by 86 percent.

OCBC announced lower profit of $597 million for 2Q13; 8 percent lower than the same quarter of the previous year. At the same time, 1H13’s profit was 13 percent lower than 1H12 mainly due to a one-time gain from the disposal of property that occurred in 2012. OCBC’s core customer business for the quarter continued to deliver strong performance with an increment of 3 percent in NII, coupled with a 2 percent increase in non-interest income. However, all profit was offset significantly by unrealised mark-to-market losses in its Non-Participating Fund from its subsidiary, Great Eastern Holdings.

UOB released its 2Q13 results with its profit up by 9.9 percent to $783 million from $713 million last year. Comparing the first half of this year against the last, profits increased by 7.5 percent to $1.5 billion. The improvement was underpinned by strong fee income, steady growth in loans and higher associates’ profits. NII for the first half of the year remained stable while it saw a slight increment of 3.5 percent on a quarter-on-quarter basis.

All three banks reported growth in loans with a compression in Net Interest Margin (NIM) of about 0.12 to 0.13 percent for the quarter. At the same time, they gave higher allowance for write-offs in anticipation of higher Non-Performing Loans (NPL).


Source: FactSet, Price Of FTSE STI vs UOB vs OCBC vs DBS

Moody’s Singapore Banking System Outlook
Last month, Moody’s released a report on Singapore’s banking system outlook that expressed their expectations of the banks’ creditworthiness over the next 12 to 18 months. We shall look at the points which Moody’s highlighted in the report.

  • Operating Environment
  • Asset Quality & Capital
  • Profitability & Efficiency

It is important to note that the report ultimately downgraded Singapore’s banking sector from “Stable” to “Negative”.

Operating Environment
The deteriorating operating environment was stated in the report as the main driver for the downgrade. Recent periods of rapid loan growth and rising real estate prices in Singapore as well as regional markets (where Singapore banks are active) were the contributory factors to the deteriorating operating environment.

In the latest quarter, all three banks reported growth in loans. This supported the point of how low interest rates have been driving a potential asset bubble. City Developments’ Kwek Leng Beng’s recent comments on the property market have also suggested a potential asset bubble was forming. He was quoted as saying that it would be “suicidal” to buy land at the current high price levels and he expected prices would decline 5 percent over the next year.

On the same note, Moody’s cited the increasing probability of increasing interest rates as a factor in the deteriorating operating environment. This is a situation not only faced by Singapore banks but with global banks as well. The low interest rate environment that is currently prevalent around the world has also been one of the factors in driving asset prices here and around the world.


Source: Moody’s, Private Property Index & HDB Resale Price Index

Asset Quality & Capital
Moody’s felt mixed about the asset quality and capital of Singapore banks. This is because Singapore banks are known to be supported by a strong level of capital despite potential asset quality weakness. A probable change in the credit cycle could put pressure on the banks’ asset quality which is currently not reflected on the asset quality ratios.

In recent years, Singapore banks have actively reducing its Non-Performing Loans (NPL) and are now performing better than their global peers. Despite the fact that the potential change is not reflected in current financials, Singapore banks are constantly put to the test by The Monetary Authority of Singapore (MAS) through stress tests. When comparing the Tier-1 ratio requirement by MAS and the Basel III requirements, MAS’s Tier-1 requirements stands at 9 percent compared to Basel’s 7 percent. This means that Singapore Banks obligated to have a larger capital buffer than their global peers.


Source: Moody’s, Tier-1 Ratio in Different Stress Scenarios

Using the Asian Financial Crisis as a gauge to model the losses incurred by banks, Moody’s performed a highly adverse scenario stress test. Singapore banks managed to maintain a ratio of approximately 6 percent in Tier-1 ratio.This proves that the high capital requirements instituted by the MAS should give local banks a good buffer in the event of a spike in NPL.

Profitability & Efficiency
The profitability of banks is expected to be compressed as interest rate rises and market volatility increases. Based on Moody’s report, Net Interest Margins (NIM) in Singapore declined 0.42 percent since its peak in 2009 and expects it to further decline in 2013. The latest quarter report by the three banks showed a decline of NIM of around 0.12 to 0.13 percent.


Source: Moody’s, Net Interest Margin (Net Interest Income as a % of Average Interest Earning Assets)

This shows the continued downwards pressure on margins and keen competition for loans as well as customer deposits. The current situation is expected and reflects the situation that is faced by banks globally.

Subordinated Debt
Subordinated debt also known as junior bonds were put on review for downgrade. In layman terms, subordinated debt holders have a higher chance of being thrown under the bus when a company faces difficulties.

A downgrade in this debt would meant that a bank has a higher chance of default. Historically speaking, all three local banks have yet to default on their debts. This includes Asian Financial Crisis which was the worst crisis in the history of the banks.


Source: Moody’s, Singapore Banks Rating

Is Singapore Banking System Weak?
In terms of earnings, I feel that the outlook will be weaker as more pressure will be on the NIM as interest rate increases. Government measures in the housing sector and auto sector will result in weaker consumer loan growth. NPL could surge in the event real estate and/or asset prices collapse. This could then result in higher write-offs by the local banks. Clearly, local banks are bracing for such a possibility. This is evident with local banks allocating higher allowances for bad loans in their latest financial results.


Source: Moody’s, Tier-1 Ratios Across Comparable Banking Markets

In terms of creditworthiness, I still feel that the Singapore banking system will remain stable despite the report from Moody’s. The reason being Singapore banks are among the strongest in the world with OCBC managing to retain 7.8 percent in Tier-1 capital despite going through highly adverse stress tests by Moody’s. This places OCBC within the Basel III requirements even during highly stressed times.

Historically, none of the banks have a history of default even at their toughest times. In the event that Singapore banks default, I am sure that they will be among the last given the fact that they have more capital than most global banks. By then, surely, it would have been an economic armageddon.

On a side note, the only banking system that still holds a positive outlook based on Moody’s report is The Philippines. Are banks in Philippines really stronger or have more prospect for growth?

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Trained in fund management, Raymond is familiar with shares and various investment vehicles.

Please click here for more information about this author.

DBS Group Hldgs  27.400 -0.09 -0.33%   
Business: [FY17 Total Income] Institutional banking (43.7%), consumer banking/wealth management (42.9%), treasury markets and others (13.4%).

Insight: Feb-19, FY18 net profit rose 28% to $5.6b as loan ... Read More
Oversea-Chinese Banking Corp  11.770 +0.05 +0.43%   
Business: [FY18 Turnover] Global corporate/investment banking (35%), global consumer/private banking (34.8%), OCBC Wing Hang (11.5%), insurance (11%), global treasury & mkts (7.7%).

Insight: Feb-19, FY18 net interest income rose 8.6% underpi... Read More
United Overseas Bank  26.800 -0.07 -0.26%   
Business: [FY18 Turnover] Group retail (43.3%), group wholesale (43.2%), global markets & investment management (5.1%), others (8.4%).

Insight: Feb-19, FY18 total income rose 6% to $9.1b attribu... Read More


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