Singapore banks' risks abated as circuit breaker measures ease

Hong Kong’s political woes may also drive wealth business and deposits to the island’s banks.

Singapore’s banks face a bright horizon ahead as the country transitions to phase 2 reopening and Hong Kong’s latest political woes drive banking activities to the island, reports UOB Kay Hian.

Banks are expected to benefit from an earlier start to the phase 2 reopening of Singapore as the stress on the corporate sector would be reduced. In particular, the reopening would reduce stress on the retail, hospitality, tourism, and aviation sectors, according to UOB Kay Hian analyst Jonathan Koh.

Phase 2 is expected to begin before end-June, and entails reopening of retail shops—including dining and F&B outlets subject to a cap of five people per group. Air travel is also making a slow comeback, with Singapore and China launching a “green lane” for essential travel, noted Koh.

Another positive on the horizon is Singapore’s growing stature as a financial centre, with Hong Kong’s recent woes driving deposits to the island. China’s National People’s Congress has passed a resolution to enact National Security Law in Hong Kong on 28 May.

“In Singapore, there was a huge increase in inflow of non-resident deposits, which increased 43.8% YoY to $62.1b in April. This was driven by expansion in fixed deposits of 81.6% YoY to $25.8b. Overall, deposits for domestic banking units (DBU) grew 13% YoY in April (2019: +8.9%) due to ‘flight to safety’,” said Koh.

Singapore will also benefit from its growth as a wealth management centre as AUM flees Hong Kong and repositions in Singapore, he added.

UOB Kay Hian raised its net profit forecast for DBS and OCBC by 5.3% and 4.5%, respectively. However, banks are not yet out of the loop, with non-performing loans (NPL) formation expected to occur in H2 2020 and H1 2021.

Further, NPL ratio is projected to deteriorate to 2.82% (from 3%) for DBS and 2.59% (from 2.75%) for OCBC at end-2021.