More pain to come for Big 3 banks

Net interest income will not race ahead: Analysts
By Gabriel Chen

ANYONE holding bank shares would have been jittery these past months, and with the three big guns having reported their fourth-quarter results it is clear investors had good reason to be nervous. DBS Group Holdings, OCBC Bank and United Overseas Bank all posted net earnings that fell below market expectations.

UOB was the last to report, announcing yesterday that profit for the three months to Dec 31, 2008, had fallen 34 per cent to $332 million.

Its two rivals did not fare much better.

DBS saw a 40 per cent drop in quarterly profit to $295 million, its worst result in three years. The fall was 30 per cent at OCBC, with profits at $301 million.

Much of their weakness was down to steep falls in the cash-generating, non-interest-based portion of earnings, like trading and capital-market activities.

The three banks also made sharply higher bad debt provisions, which took the shine off their earnings.

While net interest income (NII) - seen as a bank's lifeblood - rose, there are fears that it may not grow as fast as before. Certainly, NII - or what a bank earns from borrowers after paying interest to depositors - was a big winner for the three lenders this time.

OCBC's NII rose 28 per cent from a year ago to $783 million in the quarter, helped by a 12 per cent growth in loans. DBS saw NII rise 5 per cent to $1.12 billion, while NII at UOB surged 28.8 per cent to $957 million.

Those good NII numbers are no longer sure things. While net interest margins could inch up further this year, loan growth is expected to stay muted.

And given the sluggish lending environment, net interest income is unlikely to jump by much, stifling earnings growth.

'We expect 0 per cent loan growth for all three banks for this year,' said UBS analyst Jaj Singh.

This would be a dramatic turnaround for the lenders, as they all posted healthy loan growth for the full year.

UOB's net customer loans rose 7.7 per cent from the previous year while at DBS, they expanded by 17 per cent.

Morgan Stanley analyst Matthew Wilson said DBS confronts a challenge: 'As deposits will continue to grow, does DBS stop loan growth to preserve capital, or is it prepared to run capital down to maintain its loan-to-deposits ratio?'

All three banks saw quarter-on-quarter improvement in net interest margins.

Mr Trevor Kalcic, regional bank analyst at ABN Amro Asia Securities, said it is 'likely that at least some of the net interest margins improvement at the fourth quarter will recur this year'.

So what more can investors expect? The quality of loan books will remain an issue because there are likely to be more bankruptcies, corporate failures and increasing unemployment across Asia.

Analyst Leng Seng Choon at DMG & Partners Securities tips OCBC's non-performing loan (NPL) rate to rise from 1.5 per cent to 3.7 per cent by this December.

At DBS it could surge to 4.4 per cent from 1.5 per cent while UOB's rate is also expected to rise from its current 2 per cent, he added.

There might also be more cost-cutting. UOB has cut its final dividend to 40 cents from 45 cents a year ago and implemented a wage freeze across the board.

Deputy chairman and chief executive Wee Ee Cheong yesterday rejected talk that UOB needs to raise capital, saying: 'We've gone through a few (stress) tests. And we believe if NPL levels go up by 100 basis points, we'll be able to withstand it without getting affected.'


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