Local banks face challenging 2008

Local banks face challenging 2008




WHEN UNITED Overseas Bank (UOB) released its fourth-quarter and 2007 results last Wednesday, the last of the three local banks to do so, they were pretty much like those of its rivals. It scored on some points and fell flat on others. In other words, nothing to shout about. The negatives included the taking of more impairment charges for its collateralised debt obligations (CDO) exposure and a 14 per cent increase in operating expenses quarter-on-quarter. Positives included higher net interest income and strong growth in non-interest income.


What did set UOB apart from DBS Group Holdings and OCBC Bank was the way that the top brass of the family-run bank was insulated. At the results briefing, analysts and reporters were seated before senior managers led by chief executive Wee Ee Cheong marched in. When it was over, the audience was asked to remain seated to let Mr Wee and his team leave first – much like the instructions one hears at events graced by dignitaries of state.


That aside, instead of posting stellar results for 2007 – which after all was a buoyant year for Singapore and the regional economies – the three banks got caught, although on a relatively much smaller scale, in the US sub-prime mortgage and CDO fallout. Perhaps it is the price of diversification, of venturing into newer markets and other asset classes, and not just relying on the domestic economy.


But all three banks also ended 2007 more closely tied to Singapore – and not just to the property sector.


Since starting some 10 years ago on their overseas acquisitions, their offshore contributions are far from satisfactory.


In 2007, Singapore accounted for 70 per cent of profits at UOB and OCBC, while it was 67 per cent for DBS.


As for the banks’ property exposure, OCBC Bank is the most connected. About 60 per cent of its loans is to real estate. UOB is next with 52.7 per cent and DBS Group Holdings has the lowest exposure, at 49 per cent. Housing loans, the least risky of property related loans, made up 26 per cent in OCBC’s case, and 24 per cent for DBS and 23.9 per cent for UOB.


It is not unusual that the banks, which are only as good as the economy, have skewed their fortunes to the property sector.


Singapore has enjoyed a construction and property boom in the past 24 months, fuelled by wealthy foreigners buying homes, several mega projects including the two integrated resorts and increased demand from multinationals for offices and commercial space as they make Singapore their regional headquarters.


But the property cycle looks like it has peaked or is peaking. Some forecasts for the worst-case scenario are that luxury home prices could fall by 20-30 per cent this year, assuming that the sub-prime problems don’t end. On the other hand, the optimists said that this sector could enjoy another 10 per cent gain in prices.


In the commercial sector, already some property consultants are saying that transactions have begun to stall as banks turn more conservative.


The heads of the three local banks have said that 2008 will be challenging, given the prospects of a US recession. But there will still be loans growth, particularly from mortgages as deferred payment projects come up for financing.


But bank earnings will come under pressure even as mortgage volume growth remains strong, said Morgan Stanley in a note yesterday.


‘While we expect loan growth to remain strong for most of 2008, it won’t be enough to drive earnings growth for the banks,’ it said.


Hopefully the US slowdown will be brief, otherwise the ripple effects globally will be felt, including in Asia and Singapore. If there is a sharp recession in the US, China and India will not be the saviours to world growth. As Morgan Stanley Asia head Stephen Roach often says, ‘Chindia’ still consumes only one-sixth of what the US does.


‘It’s mathematically impossible to see a major decrease in US consumption being made up by the Chinese and Indians,’ he said.


DBS has already said that it is keeping an eye on exporters in southern China, some of whom are their customers. A US recession will impact Singapore and the banks might then feel the impact on their asset quality. If this becomes severe, they might have to take impairment charges which will hit bottom lines.


Source: Business Times


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