Complete Property Market Updates of Singapore

May 12, 2008

Banks aren’t out of the woods yet

Filed under: General,USA — Propertymarketupdates @ 3:53 am

DOGGED by a multitude of problems stemming from the sub-prime mortgage crisis in the US, banks here are not having it easy. Nor will it become easier as the year progresses. Last year saw them dogged by writedowns on their holdings in collateralised debt obligations (CDOs). Yes, they suffered from provisions made on their CDO holdings; but no, the crisis did not bring them to the point of near-collapse, as it did some of their European and US counterparts.

Investors focused on how much writedowns the local banks had, largely ignoring the other positive parts of the bank’s earnings such as their tremendous loans growth and strong fee income. The CDO issue has largely been laid to rest, but banks aren’t out of the woods yet. They still have to contend with the fallout from the sub-prime turmoil in the financial markets in terms of widening credit spreads, high inflation, slower growth and compression of their interest margins.

A proxy for the local economy, banks have been pummelled on several fronts – by the volatility in global financial markets and a softening property market. Collectively, their Q1 earnings dipped from a year ago as all three banks suffered marked-to-market losses on their investment portfolio. And even though net interest income – or profits from loans – are still holding up, the banks have warned that the over 20 per cent growth in loans seen in the preceding quarters will not continue.

Loans growth will be moderated in the coming year, and OCBC Bank CEO David Conner even noted that industry loans growth is likely to come in at the ‘low double-digit range’.

So are banking stocks worth a buy now? With no clear profit drivers and a US recession looming in the background (and what shocks that may produce for the domestic economy), the market generally has a ‘hold’ call on the banks.

Operationally, a mixed set of results makes it difficult to pin down bright spots in revenue. On the one hand, a surprising jump in interest margins means banks are earning more on their loans. That, however, will be mitigated by the lower trading and investment income, as well as lower wealth management sales, as customers shy away from buying investment products.

Net interest income will be adversely affected amid continued swings in the markets. Analysts have also pointed to higher impairment charges on loans – a function of swelling loan books and economic activity – in the coming quarters, which will take a toll on the banks’ bottom lines. Add to that mix burgeoning expenses from rising inflation, ballooning staff costs and rentals for their premises, and you have a recipe for little profit growth.

Judging from how revenue is coming under pressure, grand plans for regional expansion through mergers and acquisitions might have to take a back seat, as the local banks deal with problems on the home turf first. With Singapore accounting for the lion’s share of the banks’ profits, fixing domestic leaks would take priority over overseas pursuits.

The banking heads, though honest about the challenges ahead, are quick to point out that opportunities still abound in Singapore and the Asian region. They point to the upcoming integrated resorts, the Formula One race in September, and the still red-hot economies of China and India. But with banks so inextricably linked to the fortunes of the economy,  which is heavily affected by what happens in the US, it is fair to expect fewer reasons for cheer when the next earnings season rolls around.

Source : Business Times – 9 May 2008

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