Where Next For Singapore Banks?

The Singapore bank reporting season turned out to be a bit of a non-event. The doom and gloom that many analysts had predicted never quite materialised.

It was, in fact, very much business as usual.

DBS Group (SGX: D05) posted a modest 3% rise in quarterly profits to S$1.25 billion, compared to a year ago. United Overseas Bank (SGX: U11) reported a small rise of 5% in net income, while Oversea-Chinese Banking Corporation (SGX: O39) saw the biggest rise, some 13%.

Net interest income can be one of the main drivers of a bank’s profits. It was almost flat at DBS from last year. UOB said its net interest income rose 2%, while OCBC reported a 2% drop.

Singapore’s largest bank, DBS, has had to make more provisions for bad debts, though. They more than trebled. UOB said provisions for non-performing loans rose 59%. OCBC fared best. Its provisions for loan losses were almost unchanged.

Non-interest income can be another important driver of bank profits. DBS reported a 28% improvement in non-interest income, which was slightly higher than UOB’s. OCBC did best of all – its non-interest income jumped by more than a-third.

All three banks were able to contain expenses as a proportion of total revenue. That could become increasingly more important, as the labour market tightens and wage costs rise.

It would appear that Singapore banks are getting back their mojo, following the financial crisis of a decade ago. Their book values are improving.

DBS has seen its book value increase almost 30% from a year ago. UOB has also seen a comparable rise in its book value – some 34%. OCBC’s book value has risen 29%.

Currently, Singapore banks are valued at around 30% above book value. It would seem that the market is hoping that those values can continue to improve.

That may not be too unreasonable, provided the main driver of profits, namely, net interest income, can continue to rise. That could happen, if US interest rates continue to harden.

As to where next for the three banks…. that depends on your take on interest rates. If you believe that the cost of borrowing is set to rise, then better days could lie ahead for them.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore Director David Kuo doesn’t own shares in any companies mentioned. The Motley Fool has recommended UOB.