Published February 28, 2009

Banks' profits plunge as bad-loan provisions soar

Things may get worse as net interest margins get squeezed and credit deterioration sets in

By CONRAD TAN

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BANKS here saw their fourth-quarter net profits plunge after they were hit by mounting charges for bad loans. And analysts reckon things are likely to get worse in the months ahead as the recession wears on.

All three Singapore-listed banks missed analysts' earnings estimates, as soaring allowances for bad loans caught many by surprise. 'Provisions are surging too fast - faster than we expected,' said Pauline Lee, an analyst at Kim Eng Securities.

The combined net profit of all three banks in Q4 to end-December slumped 35 per cent to $928 million, from $1.425 billion a year earlier. Compared with the preceding Q3, combined earnings slid 26 per cent.

The banks' results were also hurt by a collapse in non-interest income, as fees from wealth management and stockbroking services suffered amid the violent swings in financial markets in the final three months of 2008.

Their combined non-interest income slid 31 per cent year on year to $1.01 billion. Quarter on quarter, it was down 9 per cent.

'Overall, it's a very weak set of results and it signals more weakness ahead,' said Ms Lee.

At DBS Group, allowances for bad loans and other losses jumped 48 per cent to $269 million from a year earlier, due to higher charges for loans to SMEs in Hong Kong and China and private-banking clients in Singapore and Hong Kong.

Earnings were also hit by one-time charges including $45 million for compensation to the 900 staff it fired in November, as well as a $47 million charge for impairment in the value of its stake in Thailand's TMB Bank.

United Overseas Bank's impairment charges for loans and investment securities soared to $381 million, almost three times the $130 million a year ago and more than double the $158 million set aside in the preceding Q3. Brandon Ng at Phillip Securities said UOB's provisions were far higher than he expected and the bank is likely to set aside even more in the coming quarters. Loans considered 'sub-standard' by UOB soared 44 per cent or $426 million in Q4 to $1.4 billion, which suggests the impairment charges 'are more to cover those loans that have become sub-standard, rather than as a precautionary measure', Mr Ng said.

At OCBC, bad-loan allowances jumped to $243 million from just $13 million a year ago and $156 million in the preceding Q3.

The only bright spot was net interest income from the banks' main lending business - which grew 8 per cent in Q4 to $2.86 billion as companies drew down existing loans and the banks benefited from a wider gap between the interest earned on loans and the cost of funding those loans.

But analysts have warned that the banks' net interest margins are likely to be squeezed in the coming months as interest rates fall. And new loans growth, which reached a breakneck pace of more than 20 per cent last year, is already slowing sharply as banks turn more cautious on lending and more businesses go bust or shelve spending plans. Bank lending here fell for a third straight month in January this year as loans to businesses continued to shrink. Total Singapore-dollar bank loans at end-January stood at $271.3 billion, down 0.3 per cent from end-December, the latest figures from MAS show.

At the Singapore banks, net customer loans - which include deductions of allowances for bad loans - dipped slightly over the three months to end-December.

Ominously, Kim Eng's Ms Lee said the 'particularly bad' impairment charges for loans at all three banks in Q4 'signals the start of credit deterioration'. 'As the economy worsens, we are likely to see similar levels of provisions in the next few quarters - and it could be even worse.'