MAS ban on FIs covers only structured notes, not structured deposits
By CONRAD TAN
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(SINGAPORE) The ban on selling structured notes is unlikely to hurt the earnings of the Singapore banks, but the damage to their reputations may take a while to repair, analysts and industry sources said yesterday.
'It's headline worthy news, but not bottomline worthy news,' said CIMB analyst Kenneth Ng. 'We don't think it'll affect the banks' earnings very much.'
One reason is that the financial crisis that led to the collapse of Lehman Brothers and saddled thousands of investors in structured notes linked to the US investment bank with heavy losses has destroyed the appetite for similar products - among banks as well as investors. When Lehman failed last September, 'everything just ground to a halt', one industry insider said.
As a result, sales of wealth management products had plunged sharply even before the ban announced by the Monetary Authority of Singapore (MAS) on Tuesday. That means the ban - six months for DBS and UOB Kay Hian, and a year for OCBC Securities - is unlikely to mean any significant additional loss of revenue for the Singapore banks.
Another reason the ban is unlikely to affect the banks' profits much is that the income from the sale of structured products was a mere fraction of their overall revenue and earnings, even when such products were in high demand.
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A senior banker told BT that even before the financial crisis struck, the fees earned from selling structured products would typically make up 5-15 per cent of wealth management fee income at the Singapore banks, or just $10-20 million a year.
While detailed earnings data for such products are not known, BT's own estimates based on the banks' income statements suggest a similar range.
Even in 2007, a record year for the wealth management business, DBS Group's wealth management fee income of $249 million made up just 4 per cent of its total income of $6.16 billion. That $249 million includes income from the sale of bancassurance and unit trusts, not just structured products.
At OCBC Bank, fee income from wealth management in 2007 was $163 million, or 3.8 per cent of its total income of $4.28 billion. And at United Overseas Bank, fee income from 'investment-related' activities that year was $209 million, or 4.3 per cent of its total income of $4.87 billion.
And the contribution of wealth management sales has since dropped sharply. In the first three months of this year, the combined net income from wealth management at the three banks was a paltry $50 million, or just 1.1 per cent of their combined revenues of $4.39 billion.
At Hong Leong Finance, the finance company which has been banned from selling structured notes for at least two years, fee and commission income from non-lending activities made up just $10.6 million, or 5 per cent, of its total operating income of $212.3 million in 2007.
A third reason the MAS ban is unlikely to harm the Singapore banks financially is that the ban applies specifically to structured notes, which MAS defines at length in a 2005 regulation, rather than all types of structured products. The banks would still be allowed to market structured deposits, such as the POSB Invest SingGrowth Account launched by DBS last month.
A major difference is that a bank offering a structured deposit is obliged to repay investors their deposit in full when it matures - a key feature of any deposit - while a structured note is similar to a bond, where the bank selling the product may not be legally obliged to ensure that investors recover their money.
Some believe that the hit to the banks' reputations may constrain the way they do their business more than any direct financial impact of the ban.
'It will take some time for trust to be regained,' said Pauline Lee, an analyst at Kim Eng Securities. 'They will have to be more cautious when selling financial products.'
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