Bad debt charges may haunt Singapore banks

Saeed Azhar

Singapore’s three banks could post sharp declines in quarterly profits this week as bad debt charges soar, and investors will be keen to see how much market share they are gaining from battered foreign players in Asia.

Malaysian banks are also likely to be hurt by a squeeze in interest rate margins following hefty rate cuts by the country’s central bank and as loan growth stutters.

Southeast Asian banks survived the initial phase of a global financial crisis relatively unscathed due to minimal toxic debts on their books, but began to feel the effects of an Asian economic downturn from the second half of 2008.

DBS Group Holdings, Southeast Asia’s biggest bank, could see its profit slide 47 percent in the Jan-March period from a year earlier, according to an average estimate by five analysts in a Thomson Reuters poll.

“NPLs have only just started to rise in the fourth quarter of 2008 and are likely to continue on an uptrend as the recession feeds through into the banking system,” Kar Weng Loo, an analyst at Banc of America Securities-Merrill Lynch, wrote in a note to clients, referring to non-performing loans.

Despite the gloomy year-on-year forecasts, analysts expect some bright spots in the first quarter, such as higher trading gains quarter-on-quarter as banks bet on volatile foreign exchange and stock markets.

Singapore banks, which are capturing market share from foreign lenders, are also gaining pricing power, which may boost interest rate margins compared with the October-December period.

“A steeper yield curve and better loan pricing should provide upside support for net interest margins despite negative loan growth,” said CLSA banking analyst Thilan Wickramasinghe.

These expectations and a renewed global appetite for risk-taking have boosted shares of Singapore banks since they hit multi-year lows in early March. Singapore’s index for financial stocks has gained almost 46 percent since hitting a year-low of 323.51 points on March 10.

But CLSA’s Wickramasinghe warned the “overarching concern” for Singapore banks is asset quality, which may translate into higher bad debt charges.

Moody’s Investors Service last month cut its ratings outlook on Singapore’s three banking groups to “negative” from “stable”, saying the global recession would hurt earnings and asset quality.

Thai banks kicked off the earnings season for Southeast Asian lenders earlier this month, with Bangkok Bank BBL.BK, the country’s biggest, reporting a 13.5 percent drop in quarterly profit.

Analysts in Malaysia do not provide quarterly forecasts, but Malaysian bank earnings are likely to take a hit from a slowing economy and lower interest rate margins due to the central bank’s 150 basis points interest-rate cut since the fourth quarter.

But a significant deterioration in overall asset quality is unlikely because of the absence of any large corporate defaults, said Loong Chee Wei, analyst at CLSA in Kuala Lumpur.

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