Published July 27, 2009

Decent Q2 seen for banks

Flat interest, better fee income expected but charges for bad loans may hit profits

By CONRAD TAN

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BANKS here are expected to report decent earnings for the second quarter, but analysts warn that charges for bad loans could still hurt profits.

'I don't see much catalyst for the second quarter - it'll probably be boring,' said Pauline Lee, an analyst at Kim Eng Securities.

Net interest income from the banks' main lending business 'will probably be flat' compared with the first quarter, she said.

And growth in loan volumes, if any, 'will not be exciting', said Brandon Ng, deputy head of research at Phillip Securities.

Overall bank lending here barely grew in the first two months of the second quarter, according to the most recent data from the Monetary Authority of Singapore.

'Fee income should be better because of the strong stock market rebound in the quarter - I do expect some positive surprises there,' Ms Lee said.

Indeed, 'what we're looking for are surprises from the non-interest income side', Mr Ng said.

OCBC Bank will be the first to report its results, on Aug 3, followed by United Overseas Bank (UOB) on Aug 5 and DBS Group on Aug 7.

'A lot will depend on the provisions. That's the wild card,' said Leng Seng Choon, an analyst at DMG & Partners Securities.

One analyst, who declined to be named, said that the banks could use the opportunity offered by a better operating performance to set aside more provisions for a possible increase in bad loans in the months ahead.

Macquarie Research analyst Tay Chin Seng expects the three banks to report a total net profit of $1.28 billion for the three months to end-June, down 24 per cent from a year earlier and 8 per cent lower than in the first quarter.

And 'while equity markets may allow for better brokerage income, investment banking, wealth management as well as transactional banking fees remain relatively weak', he wrote in a report on June 24.

Still, 'the recovery in the equity market is a positive, because it means confidence has come back', said Mr Leng.

But he, too, is cautious about the overall outlook for the banks, despite encouraging signs of recovery in the broader economy. 'The manufacturing sector is still weak', he said.

The industrial production data for June published last Friday showed that output in the manufacturing sector is still shrinking, which could mean more bad loans ahead for the banks.

'We're still seeing weakness in certain segments such as electronics, so I'd be cautious on the loans to manufacturing firms. If their revenues are down, there'll be an impact on their cash flows, employment and how aggressively they can expand,' Mr Leng said.

Ms Lee said that while the banks' net interest margins for Singapore loans are expected to remain stable compared with the first quarter, the margins on lending in countries such as Malaysia and Indonesia could have suffered from interest rate cuts by central banks there. 'The net effect is that I don't expect to see anything exciting with the overall margins,' she said.

And even in Singapore, it's not clear that the local banks will be able to charge higher interest-rate spreads on loans for very long, despite the widening of margins seen in the first quarter compared with the fourth quarter of last year. 'Spreads on loans will probably revert to the mean' as conditions in financial markets improve, Mr Ng said.

Unless demand for borrowing picks up sharply, the competition among banks to fulfil the demand that does exist is likely to keep profit margins on lending low, he noted.

'With mortgage loans, for example, you can see banks have been coming up with special promotions - it's clear that the competition is still quite stiff.'