SINGAPORE (Jan 17): According to analysts polled by Bloomb­erg, DBS Group Holdings is likely to report the highest growth in prof­it after tax (NPAT) for FY2019 end­ed Dec 31, 2019, of 12.3% (see table 1). Oversea-Chinese Banking Corp is likely to report a 6.1% rise in NPAT with United Over­seas Bank’s NPAT growth at 7.6% in FY2019. The local banks will announce their FY2019 re­sults in February, with DBS reporting on Feb 13, and the other two reporting later on Feb 21.

While the banks are set to report earn­ings growth for FY2019, analysts are less op­timistic about FY2020. Based on Bloomberg’s polls, growth is miniscule for the banks this year. Analysts are expecting UOB’s NPAT in FY2020 to drop marginally y-o-y, OCBC’s to grow by less than 1%, and DBS to record just 1% growth.

“We expect earnings growth for the banks in 2020 to be low-single-digit, as lower rates eat into net interest margins. Moreover, with global growth remaining lacklustre, muted vol­ume growth will mean net interest income is flat at best,” notes CLSA in a recent update.

Earnings growth is important for banks in order for them to maintain their dividends. In addition, retained earnings are important for banks, as they are also valued based on their NAV. Furthermore, banks need to keep capi­tal commensurate with the business they un­dertake. Retained earnings are an important source of common equity tier 1 (CET1) capi­tal. The three local banks have articulated that they intend to keep minimum CET1 ratios in the 13% to 13.5% range.

NIMs, loans growth pressured

This year could prove challenging for banks if the US Federal Reserve keeps its foot on the pedal with rates at current levels, or lower.

The decision to keep Fed Funds Rate un­changed was unanimous during the latest Fed­eral Open Market Committee meeting on Dec 10-11. According to announcements, FOMC participants expect interest rates to remain unchanged in 2020.

In a recent report, CLSA says it expects 100bps of US Federal Reserve rate cuts in 2020. The US Fed Funds Rate is at 1.5% to 1.75% as at end 2019 following three rate cuts of 25 basis points each in 2019.

However, CLSA also expects that the pass-through from US rates to Sibor and swap of­fer rates (SOR) to be “incomplete”. Pass-through refers to the correlation between US and Sibor-SOR. In the 1990s, the correlation was very high, above 80%.

In recent years, the correlation has fallen though. For instance, DBS CEO Piyush Gupta said during a results briefing that DBS mod­els a 60% “pass-through” from US rates to Singapore dollar rates for its net interest mar­gins (NIMs).

Despite the lower correlation, during the banks’ 3QFY2019 results briefings, all three banks said they expect lower NIMs this year. In FY2020, DBS is guiding for NIM around 7bps lower than the 1.9% achieved for the first three quarters of 2019.

Samuel Tsien, CEO of OCBC, indicated that OCBC’s NIMs would inevitably be low­er this year than in FY2019. “NIM for 2019 is quite well protected and will be meaning­fully higher than [FY2018]. For 2020, as a gradual reflection of lower interest rates in NIM, [lower NIM] is unavoidable and under­standable,” Tsien had said during the bank’s 3QFY2019 briefing.

UOB had guided its NIM to be 5bps to 10bps lower than the 1.79% achieved for the first three quarters of 2019.

Jonathan Koh, an analyst at UOB Kay Hian, is expecting NIMs to stabilise in the second half of this year. “We forecast NIMs for DBS and OCBC at 1.84% and 1.72% respective­ly in 2HFY2020, representing NIM compres­sion of 6bps from 1HFY2019,” he says in a recent report.

DBS is guiding for low single-digit loan growth in FY2020. During DBS’s 3QFY2019 results briefing, Gupta says DBS’s loan book should continue to grow at 4% a year. In­come growth averaged 8% to 9% over the past decade but Gupta acknowledged that in­come growth in FY2020 is likely to be weak­er because of lower interest rates. Fee and commission income which is a function of market activity is likely to grow in double digits, he indicated.

OCBC is guiding for low single-digit loan growth, while UOB guided for mid-single dig­it loan growth for this year.

Wealth management a bright spot

Monetary Authority of Singapore data indicate that inflows of monies continue to rise (see de­posits chart). Inflows from foreign currencies in 2H2019 rose notably according to this data.

“Where we do see scope for some posi­tive offset is in the non-interest-income, spe­cifically from wealth [management], which has benefitted, we think, from flows out of Hong Kong. We expect that to remain the case as tensions continue to simmer there,” says CLSA.

Singapore is ranked No 2 worldwide for com­petitiveness among wealth management cen­tres by Deloitte Consulting. In terms of quality of human capital, monetary stability, political stability and regulation, Singapore trails Swit­zerland but is ranked ahead of Hong Kong.

According to MAS, Singapore’s AUM grew at 10-year compounded annual growth rate of 12.3% to $3.437 billion in 2018.

“An increasing number of families are con­solidating their wealth by setting up family of­fices in Singapore. Family offices are private vehicles that manage tax planning investment management, estate planning and philanthro­py for wealthy families,” Koh of UOB Kay Hian observes. According to MAS, the number of family offices in Singapore quadrupled from 2016 to 2018.

Singapore’s hub status is also beneficial to the local banks. The Lion City is home to the largest number of regional headquarters in Asia. For instance, 4,200 MNCs locate their HQs in Singapore, compared to 1,389 for Hong Kong and 470 for Shanghai. Moreover, Singapore is a gateway to the Asean region, and Asian companies are using Singapore as a gateway to the rest of the world.

Both DBS and OCBC have significant wealth management businesses. Among private banks, Bank of Singapore, a unit of OCBC’s, was ranked No 6 for AUMs in Asia-Pacific in 2018.

However DBS and OCBC have substan­tial businesses in Hong Kong where glob­al bank branches including those of OCBC Wing Hang have had to shutter intermittently. For the nine months to Sept 30, 2019, OCBC Wing Hang contributed 9% to OCBC’s op­erating profit. Greater China’s contribution was much higher, at 20% of group core prof­it before tax. In 3QFY2019, DBS Hong Kong contributed 22% to net profit.

DBS and OCBC have said that their Hong Kong presence is used to tap the growth in the Greater Bay Area (GBA). Gupta has said that China’s 5.5% to 6% growth will lead to cross border investments from which DBS benefits, and these activities are booked in Hong Kong.

No impact from new digital licences

The award of licences for the new digital banks to be announced in mid-2020 is unlikely to affect the local banks in the near to medium term. For one thing, it could well be 2021 by the time the new digital banks are operational. As the new digital banks grapple with start up costs and compliance issues, DBS’s digibank will be into its fifth year, and getting closer to being profitable. UOB’s digital bank TMRW will be into its third market. TMRW’s grand plan is to be an Asean digital bank, and its business model to engage customers is very different from UOB’s.

Even as the new digital banks begin oper­ations, the local banks are not standing still. They continue to incorporate new technolo­gies such as machine learning, artificial intelli­gence, biometrics and distributed ledger tech­nology into their products.

The consensus view is that the new digital banks are likely to have a limited impact on the profitability of the local banks. Maybank Kim Eng estimates that in three years from launch, the new digital banks will account for just 1.2% of Singapore dollar loan market share.

Dividends to be maintained

OCBC has the highest CET1 capital adequacy ratio of 14.5% as at 3QFY2019. OCBC plans to implement an internal ratings-based ap­proach (IRBA) to compute risk-weighted as­sets for OCBC Wing Hang, which will lead to reduction in risk-weighted assets, boost­ing CET1 further. OCBC has said that IRBA could be approved and fully implemented this year.

If so, OCBC could have excess capital which may be returned to shareholders. OCBC is ex­pected to keep dividends at 50 cents per share this year which would represent a payout of 47.7% according to Koh of UOB Kay Hian.

“Strong capital positions and benign asset quality will support dividends, with room to surprise, if M&A endeavours fall flat,” CLSA suggests. Both OCBC and DBS were believed to be interested in Bank Permata in Indonesia before it was sold to Bangkok Bank.

CLSA has a preference for UOB “given its lower exposure to the continued uncertain­ty in China, lower sensitivity to falling rates, less volatile non-interest income, upside from TMRW and better yield support.”

DBS would become increasingly attractive on a full resolution of the trade war between US and China, and the end of protests in Hong Kong, CLSA adds.

Whatever the case, the local banks are among the best managed globally. DBS is the clear leader in digital transformation having been recognised as the World’s Best Digital Bank by Euromoney twice in 2016 and 2018. OCBC was recognised as the World’s Best Consumer Bank 2019 by Global Finance, and UOB has been recognised as the Best Domestic Bank and Best Digital Bank in Singapore, and Best Digital Bank in Thailand by Asiamoney in 2019