Singapore's banks appear well placed for an earnings rebound in 2021 after net interest margins stabilized toward the end of last year and credit costs eased, analysts say.
Net interest margins at DBS Group Holdings Ltd., Oversea-Chinese Banking Corp. Ltd., and United Overseas Bank Ltd. declined between 0.16% and 0.27% through last year to reach the lowest in five years. However, the pace of margin compression slowed by the fourth quarter, indicating that the decline may have bottomed out. Analysts believe that margins will stay stable in 2021 as the economy recovers from the pandemic.
"We are past the trough of the economic fallout experienced in 2020 and conditions are expected to only improve," said Tay Wee Kuang, an analyst at Phillip Securities Research. "Currently, there is positive risk-reward profile to the Singapore banks."
The main contributors to an earnings rebound this year will likely be lower credit costs as well as improved fee and commission income, Tay said. Banks may face an extended high credit cost cycle if non-performing asset formation accelerates, but the buffers they have built in 2020 should be sufficient as more than 80% of their loans are secured, he said.
Singapore maintained its economic growth forecast to between 4% and 6% this year after GDP contracted 5.4% in 2020, less than the government's initial estimate of a 5.8% contraction, according to revised data reported on Feb. 15. The government had earlier forecast GDP to contract between 6.0% and 6.5% in 2020 as the pandemic hurt many of the country's key industries such as tourism and trade.
Improving consumer confidence and business sentiment will aid a recovery in fee income. "With the roll-out of vaccination programs across the world, we can expect a better operating environment for business flows," Tay said.
Monetary and fiscal support from the Singapore government has also helped the three major local banks, Jefferies said in a Feb. 26 note. In 2020, the Monetary Authority of Singapore helped improved banks' access to liquidity facilities and also adjusted capital and liquidity requirement for the lenders to enhance their capacity to provide loans. The support has allowed banks to accrue revenue, build provisions while pacing the recognition of non-performing loans, Jefferies said.
"Macro-economic outlook is improving. Banks have improved operations and taken steps to capture new flows and grow in new markets," the note read. "Barring unforeseen idiosyncratic asset quality issues and overhang from large M&As, all three are expected to emerge stronger from the crisis digitally, sustainably and commercially."
Lower profits
Still, the banks did not emerge from 2020 unscathed. Profit for the year slumped 26%-33% in 2020, mainly due to increased provisions and lower interest rates. The MAS had capped 2020 dividends to free up capital for lending. The regulator is yet to announce any directive for the banks for this year.
The three banks' performance in 2020 was broadly in line with S&P Global Ratings' expectations, but they still face risks from some borrowers, particularly those requiring extension of moratorium, the ratings agency said notes following the banks' earnings announcements last month.
NPL ratios at DBS, OCBC, and UOB in 2020 increased by as much as 0.11% from 2019 levels due to more bad loan formation during the pandemic.
DBS is "not out of the woods yet" as 25% to 50% of its small and midsize enterprise portfolio is still under moratorium, despite it being "relatively small" at 11% of the bank's overall loan book, Ratings said Feb. 10.
Meanwhile, OCBC's asset quality performance will be in line with the industry as its regional portfolios in Southeast Asia could expose the lender to rising asset quality stresses, it said. UOB could also potentially record additional NPLs as moratorium unwinds in 2021.
As of March 2, US$1 was equivalent to S$1.33.