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Saturday, 21 June 2008

Net income at S'pore banks seen rising

But 2009 could be tough as economy slows, exports fall, predicts Moody's

Business Times - 20 Jun 2008
By CONRAD TAN

(SINGAPORE) The three Singapore-listed banks should still see growth in net income this year as they pass on higher costs to customers, but could struggle to show growth next year as bad loans start to rise, ratings agency Moody's said yesterday.

The outlook for the banks' credit ratings - which measure their ability to repay their debt and stay solvent - remains stable, as all three have solid capital bases and ready access to funds.

DBS Group, OCBC Bank and United Overseas Bank are all rated 'B' by Moody's. Deborah Schuler, a senior vice-president at Moody's responsible for rating financial institutions in Asia, said that while profit margins are likely to fall this year, 'net income for most banks in the region is going to increase'.

However, fee income from non-lending businesses such as securities brokerage, wealth management and risk management services, is likely to be a 'mixed bag'.

Next year looks much tougher, as the effects of slowing economic growth and falling demand for exports start to hit borrowers, said Ms Schuler.

'Credit expense and non-performing loans are lagging indicators. We don't expect to see much of the stress on loan portfolios from the slower exports and GDP growth to show up till late this year and most of that will show up next year.'

Still, 'in 2009, we expect banks are going to struggle to show growth in net income but we're not expecting losses'.

Moody's says that the outlook for the banking industry in Singapore - which it publishes separately from its ratings outlook for individual banks - is negative. Its industry outlook for the banking sector through the rest of Asia is stable or negative, 'reflecting the global stress' that banks are facing.

That stress includes weakening demand from the US, Europe and Japan, the higher cost of funds due to the turmoil in credit markets and soaring fuel and food prices that are threatening the borrowers and pushing up costs for banks.

Still, banks in Singapore and elsewhere in Asia are expected to maintain their net interest margins - which measure how much profit they make on loans net of funding costs - by passing on some cost increases to borrowers, Ms Schuler said.

The local banks here also have an edge over foreign competitors because most of their loans are funded by retail deposits that are a cheaper source of funds than money borrowed from international markets, she said.

'The Singapore banks are going to be in a good position with a relatively lower cost of funds than the other banks in town. They will be able to bid for loans, charge a bit more for them and earn better spreads.'

Despite the gloomier outlook for the banking industry in Asia over the next few months, the outlook on credit ratings of individual banks is 'overwhelmingly stable', reflecting their generally good health, said Ms Schuler.

But as capital-rich banks benefit from large companies turning to them for funds as other sources of credit dry up, the risk of banks over-exposing themselves to individual borrowers is rising, she said.

In Singapore and Hong Kong especially, the relatively small size of the domestic markets means bank exposure to individual borrowers is higher than elsewhere.

The top 20 exposures for Singapore banks are more than 7.5 times their profits before provisions - 'substantially higher' than in the US.

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