2014 augurs well for local banks
THE three local banks, among the top performers for this year, may well continue their winning streak next year, in tandem with a stronger global economy.
As proxies for positive GDP momentum, DBS Group Holdings, OCBC Bank and United Overseas Bank (UOB) are way ahead, with their share prices up as much as almost 13 per cent year-to-date.
The Straits Times Index, however, is languishing; it is down 1.67 per cent so far this year.
Such positive prospects should put the banks in the limelight, said DBS Vickers bank analyst Lim Sue Lin.
"A moderate 2014, but we are at least assured of stability and safety, possibly even positive surprises," noted Ms Lim.
"While banks have generally guided for high single-digit loan growth in 2014, there is room for upside surprises, given the positive outlook on the global front, which should pair nicely with Singapore's GDP growth outlook."
Singapore's economy is officially slated to grow 3.5-4 per cent this year and 2-4 per cent next year.
It's not for nothing that banks are seen as economic proxies; looking back this year, their performance pretty much mirrored that of the Singapore economy.
What stood out in each quarter was how the three banks managed to surprise on the upside when it came to reporting their earnings.
It was a similar pattern when it came to Singapore GDP announcements, usually 2-3 weeks after the banks released their numbers. All three quarters' final GDP figures were better than the Government's flash estimates and exceeded market forecasts.
Last month, the Government raised its full-year growth forecast to 3.5-4 per cent - not the narrowed forecast range typical for this time of year but a hike that implied growth of no less than the top end of its earlier 2.5-3.5 per cent forecast range.
The year started on a moderately sanguine note, as Singapore narrowly dodged a recession after recording 1.3 per cent growth last year.
Notwithstanding this, the three banks had an amazing 2012. Their combined net profits jumped 40 per cent to $10.6 billion from 2011's $7.6 billion, boosted by one-off gains. Excluding one-offs, the core banking business still performed pretty well, bolstered by buoyant bond markets amid record-low interest rates and strong credit demand from robust regional economies.
This year is unlikely to be a repeat of last year, given the lack of one-offs, but earnings from the core banking business have performed well despite market volatility in Q3, a slowdown in mortgages and contraction in car loans.
In the first nine months of this year, each bank posted profits in excess of $2 billion. DBS led the pack with $2.7 billion, up 4 per cent; OCBC Bank was down 38 per cent at $2.1 billion because of the absence of a one-off; and UOB had $2.2 billion, up 6.1 per cent.
Despite wobbly markets between end-May and September, the banks sold more business loans here and abroad, reaping the benefits of their overseas expansion and from marketing to foreign corporates based in Singapore.
Forty per cent of DBS' business is outside of Singapore while at OCBC, overseas profit contribution makes up 41 per cent. For UOB, overseas profit accounts for 38.2 per cent of group earnings, up from 36.7 per cent a year ago.
"Most of the pick-up in the banks' earnings was from very strong gains in fee income and trading gains in the first half, strong loan volumes and overseas loans," said Mr Harsh Modi, bank analyst at JPMorgan.
Ms Pollie Sim, chief executive of Maybank Singapore, said the low-interest-rate environment continued to weigh on its Q3 income - a trend seen as common to both local and foreign banks.
However, Ms Sim noted, "two key advantages that local banks have are their vast networks - across branches, ATMs and Nets facilities - and greater mindshare with customers. These increase their deposit stickiness and in turn enable them to enjoy a wider interest margin".