Credit costs to weigh on Singapore banks in 2020

Combined with shrinking NIMs, this will burden bank earnings.

Singapore banks’ earnings are expected to remain flat in 2020F as higher credit costs and net interest margin (NIM) compression continue to weigh in, but recovery could be underway in 2021, reported UOB Kay Hian.

DBS’ earnings are expected to decline 2.4% during the year. OCBC’s earnings are also projected to drop 2.9% over the same period.

The Monetary Authority of Singapore (MAS) eased monetary policy three times in the past, the latest which took effect after the last review in October. This is projected to impact NIMs throughout the year.

Also read: MAS eases monetary policy ‘slightly' amidst subdued economic growth

Banks also face higher credit costs due to pressure on asset quality due to uncertainties created by trade conflict. However, long-term outlook has taken a turn for the upside as a “partial” trade deal between the US and China is expected to improve relations between the two countries. The Conservative Party’s landslide victory in the UK is also expected to gradually restore business confidence, noted Jonathan Koh, director of research for UOB Kay Hian.

Interest rates are also likely to remain unchanged in 2020. As a result, NIM is expected to stabilise in the latter half of the year. DBS and OCBC are forecasted to record NIMs at 1.84% and 1.72% respectively in H2 2020, representing a NIM compression of 6bp each from H1 2019.

“We expect earnings growth to pick up to 7.3% for DBS and 6.6% for OCBC in 2021F driven by:
stronger loan growth of 5.5%; stable NIM; continued high single-digit growth in fees; and a slight moderation in credit costs,” reported Koh.

Banks also stand to gain from the rising number of family offices being set up on the island, an upside for the wealth management landscape.

Also read: Wealth and retail drive 60% of Singapore banks' fee income

“An increasing number of families are consolidating their wealth by setting up family offices in Singapore. Family offices are private vehicles that manage tax planning investment management, estate planning and philanthropy for wealthy families. According to MAS, the number of family offices in Singapore quadrupled from 2016 to 2018. Ultra-rich families seek to take advantage of tax incentive schemes for funds and residency offered,” the report noted.