Singapore banks will be reporting their first earnings report for the year with UOB on 28th April, DBS on 2nd May and OCBC on 9th May. Several key issues are expected to weigh in this quarter including the failure of Ezra which previously was one of the top players in Singapore’s offshore and marine sector.

Here are three reasons why the street is so gloomy over the Singapore banks with analysts from CIMB Research reiterating their “Underweight” call.

1. Core ROE could remain depressed


Despite the rising interest rates as the US Federal Reserve continued to hike their rates, core Returns On Equity (ROEs) of the banks are expected to remain depressed at an estimated eight percent to nine percent.

Net Interest Margins (NIMs) could see only a pickup between one basis points and two basis points as the Singapore Inter Bank Overnight Rate (SIBOR) remains flat. Higher provisions made from the after effects of the offshore and marine (O&M) sector saga might spill over to the current quarter as banks continue to write down debts in the sector as well.

2. O&M to weigh in

Several developments O&M industry have rocked the market in the past few months and are expected to have a significant impact on the local banks. Emas Chiyoda Subsea, Ezra and Rickmers Maritime went under the water after ceasing to continue as a going concern.

Emas Chiyoda Subsea and Ezra sought for Chapter 11 protection in US courts while Rickmers Maritime wound up after failing to restructure their debts. Rickmers Maritime sold all of their 14 vessels at a fire sale which netted only US$113 million against the latest balance sheet valuation of US$500 million.

These developments are expected to weigh on the performance of the three Singapore banks with higher provisions. DBS has the largest exposure to Ezra and Emas Chiyoda Subsea with $499 million while OCBC has an exposure of $297.2 million.

3. Poorer SME financing

With the expectation of higher interest rates and a more stable global economic outlook, sentiments in the market have been driven up. However, demand for loans and the effect of it on interest margin remain a concern for the sector.

However, the General Business Expectations released by Singapore Economic Development Board showed that outlook will remain stale for the first half of this year. The survey on the manufacturing sector showed a net balance of 2.0 percent of the respondents anticipating a favourable business environment while the service sector showed a deteriorating environment supported by a net 14 percent of respondents.

In general, the lacklustre business expectations showed low business confidence and might affect the growth of loans especially in the Small and Medium Enterprises (SMEs).

DBS Holdings Limited

D05Source: DBS, Bloomberg

Counting only the unsecured loans made to Ezra and Emas Chiyoda Subsea, DBS has an exposure of $499 million in total. Their exposure is expected to enlarge when including the secured loans as the collateralised assets.

Looking at the recent events in the sector, assets should fetch a much lower value in compared to the initial valuation that was made during the loan. This might result in a shortfall in provision by DBS that is estimated to be in the region of $225 million to $500 million.

Analysts from CIMB Research expects DBS to report a 35 percent year on year (17 percent quarter on quarter) fall in net profit to $760 million. They attributed it mainly to higher provisions of $350 million that were received from the gain on sale of PwC building and the extra provisions that DBS have to make for Ezra and Emas Chiyoda Subsea.

In view of the poorer performance, analysts from CIMB Research gave DBS (SGX:D05) a “Hold” call with a target price of $17.66.

Oversea-Chinese Banking Corp. Limited

O39Source: OCBC, Bloomberg

OCBC will be the last to report its financial performance and will allow investors to use the performance of the other two local banks as a benchmark. Net profit for OCBC is expected to fall slightly by 4.0 percent year on year and come in at $818 million.

Integrating Barclays’ private wealth business that it acquired, fee income is expected to be a driver of revenue in this quarter through fees generated from the additional $18.15 billion in Assets Under Management (AUM).

The higher fees generated from the private wealth business and gain in market share from its home loan business will partially offset the higher provision from the O&M sector.

Given the possibility of a high amount of offset, analysts from CIMB Research gave OCBC (SGX: O39) a “Sell” call with a target price of $8.83.

United Overseas Bank Limited

U11Source: UOB, Bloomberg

Being the first to report their performance, UOB is the only bank that is expected to have a stable net profit for the quarter. Net profit is expected to remain flat year on year and come in at $765 million. ROE of UOB is expected to outperform its peers as they are less affected by the downfall in the offshore and marine sector.

Key points that investors need to look out for will include higher securities yield by deploying excess liquidity into higher yielding assets, better trading income, steady operating expense and absence of losses from associates.

Analysts from CIMB Research gave UOB (SGX: U11) a “Hold” call with a target price of $20.37.

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