SINGAPORE (Feb 2): Singapore banks are staring at increased risks with the city-state grappling with deflation and slower economic growth, and business prospects in Malaysia and China becoming more uncertain, but the outlook for the three lenders may not be as bad as it looks, according to Credit Suisse.
The recent spike in short-term interest rates in Singapore does not bode well for the local economy, especially at a time when GDP growth is expected to moderate, Credit Suisse analysts, led by Sanjay Jain, wrote in a report, noting that higher rates will translate into, among other things, more pressure for the Singapore housing market.
At the same time, Malaysia has "suddenly emerged as a big risk" for UOB and OCBC as weaker oil and commodity prices have started taking a toll on its economy, they noted.
China, too, is seen grappling with a slowdown and could create "some stress" for Singapore banks, which have been expanding their operations there in recent years.
But despite these issues, all three lenders are still expected to hold up relatively well, according to the analysts.
"Rising nominal and real rates, decelerating economy, etc will impact the key earnings drivers of banks but there could be a difference in timing," they said.
"The street is forecasting mid-single-digit EPS growth as loan growth slows, margins widen modestly and credit cost picks up a bit. However, while margins should start expanding as Sibor rises, it is likely that credit costs show up next year, i.e., with a lag.
"Hence, Singapore banks' earnings might well be protected in 2015, especially in the case of DBS whose margins should benefit the most."
On the slowdown in Malaysia, where OCBC and UOB have been operating in for years, risks are rising but both lenders' loan exposure there is "well diversified" and not skewed towards the more vulnerable oil and gas sector, although defaults and provisions could still go up if commodity and oil prices do not recovery quickly, they said.
Meanwhile, Singapore banks' non-performing loans and credit costs in China "have remained pristine so far" despite the slowdown in Asia's biggest economy, they noted, adding that most of their loans are backed by collateral or by a large Chinese bank.
"The backing of guarantee from mainland banks and collateral should help reduce the tendency to default."
Overall, Singapore banks have a good track record in managing credit risks, they said. "We have become broadly negative on Asean banks and in the context of rising US interest rates, Singapore banks can prove to be relatively defensive."
The biggest risk for their share price has to do with the local currency, they added.
Singapore's central bank recently sought to slow down the appreciation of the local dollar by lowering the slope of its currency band.
"So the stock price appreciation might be negated by a currency decline for a US dollar-denominated investor, but this theme applies to many Asian markets," the analysts said. "Net-net, we maintain our 'market weigh' stance with DBS being our top pick."
