Net Profit in Singapore’s Main Banks to Fall By 19-33% in Q2
The three biggest banks in Singapore, which are set to release their quarterly financial results reports are highly likely to record dull findings, amidst severely low interest rates cap margins and globally reaching economic effects of the coronavirus.
As Singapore’s largest bank, DBS Group Holdings, and its main rival the United Overseas Bank will release their second –quarter financial reports on Thursday. The third bank, Oversea-Chinese Banking Corp, will follow suit with its report on Friday.
The banks are going to issue their financial reports at a time when the Singapore’s economy is in the middle of a recession, after implementing a circuit breaker partial lock down. Singapore’s government executed the circuit breaker in the second quarter to slow down the spread of Covid-19 in the country.
All Three Banks to Record Low Net Interest Margins (NIMs)
According to several top analysts the performance of all three banks in terms of Net Interest Margins will be poor. Furthermore, this is a result of a globally low interest. Krishna Guha, an equity analyst at Jefferies shares her viewpoint. She believes that NIMs, or the measure of lending profitability will fall by 11 basis points. She forecasts a fall to 26, from the first quarter.
DBS will lead with the sharpest drop in NIMS. It will be followed by UOB, while the third bank OCBC will record the lowest drop. This is accounted to the circuit breaker’s negative impact on credit card fees, wealth management fees, and investment banking fees, according to Rui Wen Lim, an equity research analyst at DBS Bank.
Moreover, David Lum, an analyst from Daiwa Capital Markets, speculates that the banks could set aside significantly higher allowances compared to previous years to prepare for inevitable losses.
Refinitiv estimates that the three top banks will record a net profit fall between 19%-33% in Q2. With OCBC’s insurance arm gains in Q2 boosting its gains.
Banks Looking At Reduced Investment Opportunities
Being the top three lenders in Singapore, the banks are looking at negatively impacting economic news. As the financial reports could reduce their lending attractiveness to investors.
Investors have for a long time favored Singaporean banks for their high investment yields. However, the recent announcement by Singapore’s financial regulator to limit 2020’s dividends payouts greatly affected their share prices and investors will likely pull back for a while or look for other investment opportunities.
“Significant uncertainty exists in terms of the length and depth of the pandemic,” shared Thilan Wickramasinghe, a brokerage investor.
He further stated that investors prefer to wait out the crisis until “better value” emerges from the banking sector.
“Moreover, with a precedent now being set where social interests take priority over shareholder interests, the risk of dividend caps lasting beyond 2020 cannot be ruled,” said Wickramasinghe.
A July report by Fitch Ratings warned Singapore’s banks are in danger of operating in a weak market domestically. This is also a concern in the rest of Asia. They worry about areas such as Hong Kong, Indonesia and Malaysia, where the top three banks also have branches.
The report said that the three banks operating environments will weaken because of the coronavirus and its effects.
