Published February 9, 2009

Banks expected to post poor Q4 results

Share performance hinges on bad loan provisions, outlook ahead: analysts

By CONRAD TAN

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INVESTORS and analysts while bracing for a set of poor fourth-quarter results from banks this month, will mainly be scouring the earnings reports for clues of what lies ahead.

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Any sharp rise in provisions for bad loans and what the bank chiefs say about the outlook for the coming months are more likely to sway the banks' share prices than what happened in the final three months of last year.

'Guidance is what everyone is looking at - the outlook in terms of loan growth as well as NPLs (non-performing loans),' said David Lum, an analyst at the Daiwa Institute of Research.

DBS Group will be the first to report its results, on Feb 13, followed by OCBC Bank on Feb 18, and United Overseas Bank on Feb 27.

As banks here prepare themselves for likely the worst recession that Singapore has experienced since it became independent in 1965, analysts are expecting the three banks to report weak fourth-quarter earnings.

'The performance will definitely be down' as compared to a year earlier or the previous quarter, said Brandon Ng, an analyst at Phillip Securities.

'What we'll be looking at is the asset quality - whether it has deteriorated,' he added.

Pauline Lee, an analyst at Kim Eng Securities, said that she would be looking closely at how much the banks set aside in provisions for bad loans. 'I think the banks will start to write down more loan losses to prepare for the economic downturn,' she added.

The government warned on Jan 21 that Singapore's economy could shrink by up to 5 per cent this year. Overall Singapore-dollar bank lending here fell in November and December as loans to businesses shrank over the two months, though the total volume of loans was still higher than a year earlier.

Few analysts expect the earnings outlook for the banks to improve soon. 'In a downturn like this, banks' earnings will typically be hit,' said Leng Seng Choon, an analyst at DMG & Partners Securities. 'The key thing that we're looking at is the level of provisions - that would be the swing factor for the earnings.'

The bad news and poor earnings outlook has exacted a heavy toll on the banks' share prices. Since the end of September last year, DBS's shares have slumped 41 per cent in value, after adjusting for its recently completed $4 billion rights issue. OCBC's shares are down 29 per cent, while United Overseas Bank's shares have fallen 33.2 per cent.

Given the volatility in financial markets and uncertainty over the nature and timing of a broader economic recovery, 'I wouldn't expect much guidance', said Mr Lum. But 'at least we can get an idea of what happened up to January or the first or second week of February - it gives some sort of indication of what could happen,' he added.

At DBS, investors will also be keen to hear any updates on the bank's plans, after the shocking news on Jan 29 that its chief executive, Richard Stanley, had been hospitalised for cancer treatment and would be on medical leave for up to half a year. Koh Boon Hwee, its chairman, is overseeing management of the group while Mr Stanley is away.

DBS is expected to report the lowest Q4 earnings among its peers, according to the average forecast of six analysts surveyed by Reuters last week. Its net profit could fall to just $324 million in the fourth quarter, down 34 per cent from a year earlier, according to the Reuters poll.

OCBC and UOB are expected to report Q4 net profit of $381 million and $468 million, respectively, down 11 per cent and 7.5 per cent compared to a year earlier, according to the average forecast of the analysts polled by Reuters.

DBS said in December that its fourth-quarter net profit could be 'moderately lower' than in the third quarter, before one-time charges. That would make it the group's worst quarter since at least the end of 2005, when it reported a profit of $384 million, excluding goodwill charges and one-time gains.

Including one-time charges, the Q4 results are likely to be much worse. DBS is expected to take a charge of $45 million for compensation paid to the 900 staff that it fired in November. It also expects a further impairment of its investment in Thailand's TMB Bank. TMB's share price slumped 41 per cent over the fourth quarter.

Kim Eng's Ms Lee estimates that one-time charges at DBS in Q4 could reach $111 million, including a $50 million charge for the plunge in value of the bank's investment in TMB and a $16 million writedown of the group's investment in Indian joint venture Cholamandalam DBS Finance.

Still, interest income from the banks' main lending business should remain relatively healthy in the fourth quarter at all three banks, she said. 'The loans growth is still resilient, although it has tapered off a bit. Interest margins should hold up pretty well.'

And DMG's Mr Leng said that 'our sense is that the asset quality in December would not have deteriorated too much as yet'.

'But looking ahead, the asset quality deterioration will of course accelerate,' he added.

Other potential sources of surprises in the banks' Q4 earnings are charges for the impairment of goodwill from past acquisitions, which is typically reviewed at the end of each year. Morgan Stanley analysts Matthew Wilson and Anil Agarwal warned in a report late last year that there was 'some risk of impairment' in goodwill at the year-end.