Coronavirus to Hit Singapore’s Major Banks With a 20% Fall In Net Profit

Contrary to a strong run in 2019, Singapore’s Banks are now headed for a 20% downfall. It could be as much as 20% in the first quarter of 2020. This is due to the effects of coronavirus on the global economy and the crash in oil prices, Refinitve estimates.

In a piling list of dire economic news for Singapore’s economy, analysts expect the fall to hit the net profit of all three major Singaporean banks. It will rain down especially hard on the largest bank, DBS Group Holdings, with a 32% decline.

Singapore houses some of the biggest energy traders in the Asian financial market. It is home to United Overseas Bank (UOB) and Oversea-Chinese Banking Corp (OCBC). So far, the three banks have collectively experienced a downturn of about 20%.

“The way we’re thinking about Singapore banks is pretty straightforward that in the near term, yes there are risks to margins, there are risks to asset quality and given that it’s very difficult to quantify these at this point in time…stocks will trade at a wider discount to fair value.” Said JP Morgan’s co-head of Asia ex-japan for financial research, Harsh Modi, while speaking to CNBC via Street Signs Asia.

Further Effects on Singapore’s Economy and Overall Growth in ASIA

Only two days ago, Singapore and Japan were reported to constitute the main economic weak points. They will significantly contribute to a zero growth rate in the Asian Pacific region for 2020.

Now with the three banks quarterly reports expected within a short margin of each other, analysts maintain that the second quarter will likely be worse than the first for all three.

BDS will release its financial report card for the first-quarter earnings on April 30, followed by UOB on May 6 and finally OCBC on May 8.

The strict lockdown measures in Singapore have been enacted to combat the spread of coronavirus. They have brought all major economic activity to a standstill. All non-essential services expected to remain shut for a while.

According to a report published by Reuters, Hin Leong Pte Ltd oil trading company, one of the biggest in Singapore’s energy sector, has already run out of money and has applied for judicial management.

“The company is in the process of applying for judicial management, and at the same time, actively looking for strategic partners to raise cash.” Said a source with information about the company’s plans.

Hin Leong now owes approximately $3.85 billion to 23 banks in Singapore. This is about $293 million it owes to DBS, $220 million to OCBC, and $100 million to UOB.

Positive Impact Might Result From the Global Low Interests Trend

Analysts predict that the banking sector in Singapore will take a huge hit in net profits. However, they still expect to see a slight rise in net interest margin from an increase in affordable loans.

“We expect loans to see healthy growth. Non-interest income may see growth in trading related segments, but wealth management, credit cards fees may likely be softer.” Said Maybank Kim Eng’s analyst, Thilan Wickramasinghe.

The impact of the oil prices crash will have investors looking for guidance from the banks. This is specifically regarding the future of the local and the global economy. Fortunately, analysts say the banks might be able to bounce back.

“At some point in time over the next six to 12, potentially 18 months,-as we start fully pricing in the profit and loss impact of these issues, that’s when these stocks will become very attractive. But at this point, we hold a relatively, cautious view for the short term.” Modi added.

Furthermore, analysts do say that previous oil price crashes haven’t been as severe as the current one. However, major banks have since learned to take precautionary measures.

These include setting up rainy day funds to prepare for loan losses and asking for more collateral from loan borrowers. While this might hurt their profitability, it helps to caution their crash landing in case of a global financial crisis.

Modi concludes that some of the oil traders will experience a cash flow problem. At the same time, though, the effect will not be as adverse as the last crash which occurred in 2016-2017.