Published February 28, 2009

Commentary

You can take this to the bank - the worst is yet to come

By SIOW LI SEN
SENIOR CORRESPONDENT

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THE drop in 2008 profits of the three local banks was no surprise. After all, the banks' performances have always reflected the domestic economy, given that some 70 per cent of their activities are Singapore-based. Analysts have been scouring the numbers to see how the banks' bad loans have been piling up and the amount put aside for loans expected to go sour.

What keeps the head honchos awake is the banks' exposure to the small and medium-sized enterprises and property developers.

In the case of DBS Group and OCBC Bank, both increased allowances by about 10 times for 2008. DBS's allowances rose to $784 million from $82 million a year ago while OCBC's rose to $447 million from $36 million.

At United Overseas Bank, impairment and amortisation charges rose 163 per cent to $818 million from $311 million.

But non-performing loan (NPL) ratios were only marginally higher. The NPL ratio at both DBS and OCBC in Q4 rose to 1.5 per cent, from 1.3 per cent previously. UOB's NPL ratio increased to 2 per cent from 1.5 per cent. So the numbers don't look too bad. Some would even say that the little-changed dividend payouts were reassuring. The payout at DBS and OCBC remained unchanged while at UOB, the drop in final dividend was small, to 40 cents from 45 cents previously.

Bank chiefs were quick to point out that they have been prudent in selling loans, especially to the now-battered real estate sector. And while negative equity has already made a comeback among home loans, it is not alarming mainly because most people's instalments are still current.

What keeps these head honchos awake is the banks' exposure to the small and medium-sized enterprises (SMEs) and property developers. Local banks are the leaders in lending to these segments which are taking the brunt of Singapore's worst downturn. Taking a closer look, the NPL picture for the SME segment was pretty bad.

NPLs in the manufacturing sector represent 4.5-5.1 per cent of loans. NPLs in general commerce is 2.1-3 per cent. NPLs to developers, lumped into the category of financial institutions, investment and holding companies, come to 1-1.8 per cent.

What else is scary? As David Conner, OCBC chief executive, said last week at the bank's results announcement, negative equity does not drive NPLs as long as people are employed. 'Stress is from unemployment,' he said.

DBS economist Irvin Seah on Wednesday said that more than 99,000 jobs could be lost by next year, pushing the unemployment rate to 5 per cent, a 20-year high by the middle of 2010. The unemployment rate was 2.6 per cent at end-2008.

Up to 20,000 retail employees could be jobless unless store rents are slashed, said the Singapore Retailers Association on Thursday after an emergency meeting. In releasing the number as part of a plea to landlords, the retailers rightly noted that other industries which feed off the retail sector - such as the media, food & beverage and advertising - will axe their staff as tenants go belly up.

Singapore's economy shrank 4.2 per cent in Q4, worse than the 3.7 per cent decline estimated last month. The economy could contract between 2 and 5 per cent this year, said the government.

Matthew Wilson, a Morgan Stanley analyst commenting on the bank results, said that it was still early in the NPL cycle and that it tends to lag the real economic performance. Hence, the scary aspect is what lies ahead of us. 'Unfortunately, the worst is in front of us.'