Rising interest rates and healthy loan growth should boost local bank profits this year, even as concerns linger about their exposures to the troubled oil and gas sector, analysts said.
RHB Securities Research analyst Leng Seng Choon said in a report yesterday that the recent spike in the three-month Singapore interbank offered rate should widen net interest margins this year.
Loans across the three local lenders - DBS Group, OCBC Bank and United Overseas Bank (UOB) - are also expected to rise steadily.
"The outlook for 2018 loans growth remains bright, with their managements guiding for mid-to-high single-digit loans growth. Recent activity in residential property en bloc sales is a contributor to loans expansion," he noted.
Strong fourth-quarter gross domestic product numbers could also lead to more investments by corporates in relevant sectors and, correspondingly, to strong loans disbursement. Still, Mr Leng noted that the three banks' third-quarter results pointed to continued deterioration in oil and gas asset quality.
"We forecast continued rising non-performing loan ratios. Although crude oil prices have strengthened over the past few months, managements are of the view that oil and gas support service firms are likely to face pressure from low charter rates and excess systemic capacity," he said.
"Hence, this segment could see asset quality deterioration."
DBS Group Research analyst Lim Sue Lin said in a note last Thursday that she expects asset quality issues at UOB and OCBC to have been dealt with by the end of last year.
She said that UOB would likely have taken another big hit from non-performing loans in the fourth quarter of last year.
"This should mark the end of massive asset quality upsets. Further improvement in net interest margins and, more importantly, a pickup in loan growth due to the recovery of the property market should support earnings strongly," Ms Lim said.
She also noted that OCBC has dealt with its asset quality issues relating to the oil and gas segment "and sufficient provisions are said to have been made".
UOB shares will be especially buoyed by the recovery in the property market, she said, as the lender has the largest proportion of property-related loans among local banks.
OCBC shares, meanwhile, could get a strong re-rating catalyst from a recovery of its asset quality indicators. Its wealth management and insurance operations, which are holding up well, will remain a key differentiator of growth against its peers, Ms Lim said.
OCBC shares closed flat at $12.95 last Friday while UOB stock fell 11 cents to $26.91 and DBS dropped 18 cents to $26.32.