Singapore’s top banks brace for more challenges after reporting a plunge in quarterly profits

Singapore’s three largest banks reported a sharp fall in second-quarter net profits compared to a year ago as they beefed up reserves in anticipation of the challenges ahead.

The trio — DBS Group Holdings, Oversea-Chinese Banking Corp and United Overseas Bank — warned last week that the global environment remains uncertain even though some business activity has picked up as economies reopen from coronavirus lockdown measures.

Singapore, a small Southeast Asian country, is a major financial center exposed to global and regional economic shocks. But its financial system has remained resilient, thanks to regulatory oversight which the International Monetary Fund once described as “among the best globally.”

The three banks are major players in Asia, and are favored by investors for their steady profitability and close ties to the region’s growth story. 

Here’s what they say they’re expecting in the coming months.

Like many banks globally, Singapore’s top lenders have opted to set aside significantly more funds for potential loan losses as the coronavirus pandemic continues to slam the global economy.

In the first six months of this year, DBS shored up its total allowances to 1.94 billion Singapore dollars ($1.42 billion). OCBC and UOB set aside 1.41 billion Singapore dollars ($1.03 billion) and 682 million Singapore dollars ($497.5 million), respectively.

The numbers could go up even more given the weakened business conditions and risk of further Covid-19 outbreaks, according to the banks.

Many governments are supporting the economy with relief measures including wage subsidies and deferments in loan repayments. But some of those measures are scheduled to end in the coming months, which could result in more companies and households failing to repay their loans.

DBS said its total allowances could reach 3 billion to 5 billion Singapore dollars ($2.19 billion to $3.65 billion) over 2020 and 2021, while OCBC estimated it could reach 3 billion to 4 billion Singapore dollars over the same period. UOB projected provisions to rise between 2 billion to 3 billion Singapore dollars through next year.

With global interest rates at an all-time low, the three banks reported a sharp decline in net interest margins in the second quarter. Net interest margins, or NIMs, measure how profitable bank lending is by comparing the difference between interest charged on loans and that paid out to depositors.

Here’s what the banks said about the trajectory of margins in the coming months:

• DBS projected full-year net interest margin to trudge lower to around 1.6%, after registering NIM of 1.74% in the first-half of 2020;
• OCBC said it expects NIM to be “slightly down” in the second half of the year but remain in the ”high 1.5% range.” The bank reported NIM of 1.68% in the first six months this year;
• UOB said margins could improve in the second half of the year after hitting “trough levels.” In the first half of 2020, the bank’s NIM was 1.6%.

All three banks declared lower dividend payouts compared to last year. Still, some analysts have maintained their positive outlook for the sector. 

“We reaffirm our Positive rating on the sector as the results were reassuring on the asset quality front, which is really what matters in a crisis, in our view,” David Lum, an analyst at Daiwa Capital Markets, wrote in a note last week.