In Focus
FINANCIAL SERVICES | Sandra Sendingan, Singapore

Banks fall from grace as lending and non-interest income take blow

The volatile stock markets may bring about as much as 15% decline in non-interest income for DBS and OCBC.

Singapore’s big banks who have enjoyed a steady uptrend are increasingly facing dismal prospects of slowing growth amidst softening lending figures and declining non-interest income clouding quarterly performance.

With lenders set to report their Q3 financial results by end-October and early November, analysts are widely expecting that the global rout which has spared no major market from the downturn to drag the performance of non-interest income which are largely sourced from wealth management units, insurance and trading income.

Also readSingapore banks turn to China's wealthy to offset slumping stock markets

DBS and OCBC are poised to bear the brunt of the fallout as they could be hit by 10-15% decline in non interest income in Q3 unlike UOB which may emerge relatively unscathed with a modest decline of 3%, Krishna Guha, equity analyst at Jefferies said in a report.

“Focus will be on impact of volatility in regional currencies and equity markets (especially tech-related shares) on wealth management and insurance,” he added.

This corresponds with the larger footholds of DBS and OCBC in Greater China which puts them at the forefront of growth in the second largest economy - through Dao Heng Bank and Wing Hang Bank - but also puts them in a vulnerable position to assume growing risks brought about by escalating tensions with the US.

Wealth management, in particular, is expected to be amongst the hardest hit segments despite its previous status as a revenue-generating business in the earlier parts of the year and 2017. In Q1, the wealth management business of UOB surged 30% to $165m, a positive trend that could also be observed for OCBC (+22%) and DBS (+17%).

But it’s all downhill from there. “We believe that wealth management income had peaked in 1H18,” analyst Rui Wen Lim of DBS Equity Research said in a previous report, as tough environment is heaping pressure on assets under management (AUM).

Also read: Banks turn to loans to boost earnings as wealth income weakens 

The insurance business of OCBC also took a hit from the protracted market downturn that hit trading activities as total new total new weighted business premiums and new business embedded value booked disappointing performances in Q1, according to an earlier report from DBS Equity Research.

Profits from lending are also poised to slow down with OCBC’s trade loan portfolio likely losing luster. With loan growth slowing down in Singapore and HK, Guha notes that DBS and OCBC are likely to report about 1% QoQ loan growth whilst UOB may report faster lending figures driven by ex-SG.

“We expect net profit of $1.41b, $1.14b and $1.02B for DBS, OCBC and UOB respectively. Our estimate is inline with FactSet consensus for OCBC but 3-4% lower for DBS and UOB. On the year, these will result in +25%, +10% and +21% growth for DBS, OCBC and UOB. QoQ, net income will grow +5.7%, -5.8% and -5% for DBS, OCBC and UOB respectively,” he added. 

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