Singapore banks Q3 profit beats expectations, cautiously optimistic on outlook

Local banks said they have ample provisions to tide through uncertainties ahead.
Local banks said they have ample provisions to tide through uncertainties ahead.PHOTO: ST FILE

SINGAPORE - DBS and OCBC posted better-than-expected third-quarter earnings while setting aside more allowances against potential bad loans amid the coronavirus pandemic, joining United Overseas Bank that reported a day earlier. 

The local banks also struck a cautiously optimistic tone as regional economies pick up pace, and said they have ample provisions to tide through uncertainties ahead. 

Shares of all three banks rallied in the morning, more than the rise in the benchmark index. By 12:50pm, DBS Bank added 83 cents or 3.8 per cent to $22.38, and OCBC Bank rose 30 cents or 3.5 per cent to $8.93, while UOB gained 55 cents or 2.8 per cent to $20.35. The Straits Times Index was up 1.85 per cent.

DBS Group Holdings posted a 20 per cent drop in third-quarter net profit to $1.3 billion from $1.63 billion a year earlier, as it set aside higher allowances for potential bad loans and lower net interest income. 

Earnings topped the $1.12 billion average estimate of eight analysts surveyed by Bloomberg.

The board has declared an interim dividend of 18 cents a share, down from 30 cents for the year-ago period, to which the bank’s scrip dividend scheme will be applied.

South-east Asia’s largest bank set aside allowances of $554 million in the third quarter. Together with allowances of $1.94 billion in the first half of the year, total allowances in the first nine months of this year quadrupled to $2.49 billion from a year ago, DBS said on Thursday (Nov 5).

Three-fifths, or $1.5 billion, of this amount were general allowances conservatively set aside to fortify the balance sheet against macroeconomic risks. 

The bank’s non-performing loan (NPL) ratio weakened to 1.6 per cent from 1.5 per cent a year ago. 

DBS also saw lower net interest income, which fell 12 per cent year on year to $2.17 billion as loan growth was offset by a lower net interest margin. The drop was 6 per cent from the previous quarter.

Net interest margin fell nine basis points to 1.53 per cent as the impact of global interest rate cuts in March and April was more fully felt. Net interest margin is a key gauge of profitability for banks, measuring the difference between income earned from loans and the interest paid to depositors. 

DBS’ annualised earnings per share stood at $1.98 for the quarter, a decrease from $2.50 a year ago.

Compared with the second quarter, net profit rose 4 per cent as fee income rebounded 17 per cent to pre-pandemic levels. This softened the impact of lower interest rates and a decline in trading income from a high base. 

DBS chief Piyush Gupta said the third-quarter results reflect a recovery in business momentum as regional economies emerge from lockdowns. 

"The rebound in fee income to pre-Covid levels has enabled us to cushion the full impact of lower interest rates. At the same time, the accelerated build-up of allowances has strengthened our ability to meet the challenges of an uneven economic recovery in the coming year," he said.

Loans were stable in constant currency terms at $371 billion as underlying loan momentum remained healthy, said DBS.

Further drawdowns of non-trade corporate loans were offset by the repayment of short-term facilities made in the first half. While Singapore housing loans dipped due to the delayed impact of the circuit breaker in the second quarter, new bookings rebounded strongly in the third quarter, DBS noted. 

Net profit for the first nine months fell 24 per cent year on year to $3.71 billion due to the higher allowances. 

Mr Gupta told a media briefing that loan moratoriums are masking what is happening in the underlying economy and expects non-performing assets to increase as government relief programmes wind down. 

“At this point, it’s hard to call what will happen to these companies once the moratorium is over,” he said.

The Monetary Authority of Singapore and financial industry last month extended support for individuals and businesses grappling with the impact of the Covid-19 pandemic. This includes the extension of the debt moratorium expiry from the end of the year to 2021.

Mr Gupta noted that the bank kept its guidance for total allowances of $3 billion to $5 billion over two years, with the amount it expects to take in allowances in 2021 expected to be lower than this year.

Meanwhile, OCBC’s net profit dipped 12 per cent to $1.03 billion from $1.17 billion a year ago, on the back of lower net interest income and more allowances set aside for loans.

Its earnings topped the $850 million average estimate of analysts surveyed by Bloomberg.

Net interest income fell 11 per cent year on year to $1.42 billion, amid a sustained low interest rate environment. 

Non-interest income rose 6 per cent to $1.12 billion, led by higher trading income and insurance profit. 

Total allowances increased by 8 per cent year on year to $350 million, but fell from $750 million in the previous quarter. 

Net profit rose 41 per cent from the previous quarter on the back of the lower allowances. 

OCBC chief executive Samuel Tsien said that the economic outlook is still uncertain and it is important for the bank to continue strengthening its capital and balance sheet. 

"This will position us well for the crisis and enable us to emerge well-prepared for new opportunities when the market recovers."

He added that OCBC has set aside prudent levels of allowances, and will stay vigilant in managing its credit portfolio as it works closely with customers to ensure a smooth and disciplined transition out of the moratorium programmes. 

OCBC does not expect a fresh wave of loan moratorium requests amid the extension of targeted debt holidays in Singapore, even as it continues to chalk up provisions to buffer against bad loans, The Business Times reported on Thursday.

Mr Tsien told a media briefing that the bank is working on an extension of the relief support scheme for affected customers, though it will not be “on a blanket basis” as compared with earlier measures introduced in the second quarter.

On Wednesday, UOB posted a 40 per cent drop in third-quarter net profit to $668 million from $1.12 billion a year earlier. It set aside an additional $339 million in credit allowance for non-impaired assets to strengthen provision coverage. 

The bank’s earnings were better than expected, topping the $641 million average forecast by analysts in a Bloomberg poll.