Commentary: Singapore banks should swap exuberance for skepticism

ATM machines from UOB, DBS and OCBC Bank, at Changi Airport.
ATM machines from UOB, DBS and OCBC Bank, at Changi Airport. PHOTO: ST FILE

HONG KONG (BLOOMBERG) - It took an earnings announcement from the smallest of Singapore's banks to shake the edifice of optimism that investors had built around all three of them.  United Overseas Bank's 5.5 per cent profit growth in the June quarter was better than what analysts had expected. Yet UOB's shares fell 2.2 per cent on Friday (July 28) (they closed 0.3 per cent lower on Monday), dragging down stocks of bigger rivals - DBS Group Holdings and Oversea-Chinese Banking Corp.

Chalk up the nervousness to exuberance. A year ago, investors weren't willing to pay even 1 time the consensus estimate of banks' book value. Now the lenders command premiums of 12 to 20 per cent on the same metric. While that doesn't make Singaporean lenders as richly valued as their Hong Kong or Australian counterparts, the run-up in share prices has effectively sidelined investors' outsize concerns over asset quality.

UOB's financials serve as a reminder that investors have perhaps been a tad too hasty in thinking that the trio's exposure to Singapore's distressed offshore and marine industry is no longer as big a problem as it was in 2016. Independent banking analyst Daniel Tabbush came up with this chart when he plotted the formation of new nonperforming assets at UOB versus recoveries: A sequential doubling of new nonperforming assets for two straight quarters, net of recoveries, punches a large hole in the bull case for Singapore banks. Asset quality is still showing no sign of getting better.

As for the crowd-pleasing 22 per cent increase in second-quarter net income at OCBC, writing for research website Smartkarma, Tabbush puts most of it down to a "staggering" 200 percent jump in the quarterly profit of OCBC's insurance arm, Great Eastern Holdings Ltd. Moreover, as he notes, 30 per cent of this bumper harvest of insurance earnings came from a revaluation of assets and liabilities and other such non-recurring, non-operational items.

All this is finally making investors a little realistic about DBS, which is due to report earnings on Friday morning. The stock's two-day, 2.8 per cent slide is the steepest since just before the lender posted its full-year 2016 results in mid-February.

Short-term interest rates in Singapore are also working against banks. Two years ago, interbank rates used to be about three-quarters of a percentage point higher than in Hong Kong; now they're almost a fifth of a percentage point lower than in the Chinese territory.

Hong Kong's short-term interest rates, although stuck below the 1 per cent-plus levels they reached earlier this year, are still high enough to give the city's lenders a margin boost. That could offset the slowdown in volume growth that's occurring because of regulatory efforts to calm runaway house prices, according to Bloomberg Intelligence analyst Francis Chan.

Singaporean lenders, however, will struggle to charge more for credit, especially since it's still unclear if the property market has bottomed after 15 consecutive quarters of sliding prices.

It's not just about asset quality. Even the core business of Singapore banks needs a healthy dose of skepticism.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Andy Mukherjee is a Bloomberg Gadfly columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.