Singapore banks are mostly set to post double-digit rises in quarterly earnings as loans grew and bad debts declined, but rising inflationary pressures are raising medium-term concerns that higher rates may squeeze margins.
The city-state’s banks are benefiting from a strong recovery in the domestic economy, which is projected to expand as much as 9 percent this year, its best annual performance since 2004. Singapore’s economy shrank 2 percent last year.
But inflation — which is expected to hit a two-year high in the fourth quarter — is also posing a risk to short-term interest rates, which hit rock bottom during the financial crisis as Asian economies battled the global financial crisis.
“The main risk is an interest rate risk — a sharp repricing of the short-end of the curve which would result in a narrowing of net interest margins,” said Peter Elston, a strategist at Aberdeen Asset Management Asia.
“That repricing of the short end would be the result of a sudden change in inflationary expectations,” said Elston. Aberdeen owns OCBC and UOB in Singapore and Public Bank in Malaysia.
Analysts are bullish about bank earnings as strong capital markets and higher trading in currencies and bonds have helped lift results at global banks that are recovering from the credit crisis.
“The market will be looking for evidence of revenue recovery and that the earnings uplift from lower loan impairments is now largely a foregone conclusion,” Natasha Midgley, an analyst at Standard Chartered, said in a note. “In light of recent newsflow, we see scope for revenue-driven earnings’ upgrades.”
Banks will also benefit from a strong recovery in investor demand for mutual funds and insurance products, boosting fee income.
Analysts are also looking for clues from DBS chief executive Piyush Gupta on the progress he has made in implementing his new strategy that aims to widen the Singapore bank’s reach in Asia.
JPMorgan’s Harsh Wardhan Modi said Gupta has made a promising start, but he would like to see more progress in improving DBS’s Hong Kong business and gaining bigger market share in the segment serving small-and-medium enterprises as Asian economies recover.
In Malaysia, where most analysts do not provide quarterly forecasts, Macquarie Research expects banks will report on average a 43 percent growth in net profit for Jan-March from a year ago, amid lower bad-debt charges.
Maybank’s earnings are set to outperform this year after its last financial year was marred by big writeoffs linked to acquisitions in Indonesia and Pakistan.