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03-05-2014, 10:33 AM
China playing key role in S'pore banks' profit growth
Published on May 3, 2014 1:25 AM
By Goh Eng Yeow Senior Correspondent
AN INTERESTING takeaway from the first-quarter results released by Singapore's three local lenders is the role China now plays in determining the growth in their bottom-line earnings.
DBS Group Holdings reported a 9 per cent jump in firstquarter profit to $1.03 billion. Including one-off items, that gain would have risen to $1.23 billion. Over the same period, OCBC's net profit jumped 29 per cent to $899 million, while United Overseas Bank's (UOB) net profit climbed 9.2 per cent to $788 million.
Going beyond the headline numbers, what enabled both DBS and OCBC to beat market expectations of their earnings was the boost they received from their China-related activities. UOB's in-line results were a reflection of its smaller China exposure.
As CIMB Research's Mr Kenneth Ng and Ms Jessalynn Chen noted in their analysis of the three banks' results: "While its peers saw treasury, trade and loan fees bloom on the back of China-related activity, UOB's coyness with China trade loans left it shy of a non-net interest income driver in the first quarter when Asean customer flows slow."
In the case of DBS, they noted that one factor driving its first-quarter growth was customer hedging on yuan trades. However, they believe that the weakening of the yuan in the current quarter might lead to a slowdown in some of these hedging activities.
Similarly, for OCBC, the analysts noted that while part of the bank's improved spread on its net interest margins had come from corporate and consumer loans, it also received a boost from higher yields on the excess yuan placed in the market.
They said: "Management clarified that OCBC's exposure to China trade was mainly through the importers of basic raw materials and commodities. The Greater China non-trade loans go towards funding the large Chinese corporates' business expansion into Asean, and not to China infrastructure or property."
Yet, strangely enough, during much of the quarter under review, UOB's stock price outperformed that of DBS, presumably because of its lower China exposure and the vast Asean business franchise which it has developed.
But the CIMB analysts said: "After the year-to-date outperformance, we reckon that UOB will now lag."
They have also turned positive on OCBC, which is acquiring Hong Kong's Wing Hang Bank to expand its outreach in China, because of the lender's rising loan spread and sustainable loan growth.
But traders are mindful that getting hitched to China's growth bandwagon can be a double-edged sword, since sentiment can suddenly turn sour if there is a sudden negative flow of news out of the mainland.
It was only recently that concerns were raised over a possible bad debt crisis in the Chinese banking system, following the default on a bond payment by a mainland state-owned company.
That, in turn, cast a pall over China lenders listed in Hong Kong and foreign lenders with big China exposure such as HSBC Holdings and Standard Chartered Bank.
In his report, Citi Research analyst Robert Kong said that DBS had confirmed it had analysed its China exposures and "remains wholly comfortable with the quality of the book".
"Our sense is that DBS is enjoying the strongest and the broadest-based business momentum, while UOB is facing more near-term challenges."
Barclays Capital Equity Research's Ms Sharnie Wong noted that UOB reported flat margins as its China growth strategy is more conservative and it is less exposed to China-related trade loans.
Whether that turns out to be a boon or bane as the three lenders pursue their different China strategies, the next few quarters will bear watching.
engyeow@sph.com.sg
Published on May 3, 2014 1:25 AM
By Goh Eng Yeow Senior Correspondent
AN INTERESTING takeaway from the first-quarter results released by Singapore's three local lenders is the role China now plays in determining the growth in their bottom-line earnings.
DBS Group Holdings reported a 9 per cent jump in firstquarter profit to $1.03 billion. Including one-off items, that gain would have risen to $1.23 billion. Over the same period, OCBC's net profit jumped 29 per cent to $899 million, while United Overseas Bank's (UOB) net profit climbed 9.2 per cent to $788 million.
Going beyond the headline numbers, what enabled both DBS and OCBC to beat market expectations of their earnings was the boost they received from their China-related activities. UOB's in-line results were a reflection of its smaller China exposure.
As CIMB Research's Mr Kenneth Ng and Ms Jessalynn Chen noted in their analysis of the three banks' results: "While its peers saw treasury, trade and loan fees bloom on the back of China-related activity, UOB's coyness with China trade loans left it shy of a non-net interest income driver in the first quarter when Asean customer flows slow."
In the case of DBS, they noted that one factor driving its first-quarter growth was customer hedging on yuan trades. However, they believe that the weakening of the yuan in the current quarter might lead to a slowdown in some of these hedging activities.
Similarly, for OCBC, the analysts noted that while part of the bank's improved spread on its net interest margins had come from corporate and consumer loans, it also received a boost from higher yields on the excess yuan placed in the market.
They said: "Management clarified that OCBC's exposure to China trade was mainly through the importers of basic raw materials and commodities. The Greater China non-trade loans go towards funding the large Chinese corporates' business expansion into Asean, and not to China infrastructure or property."
Yet, strangely enough, during much of the quarter under review, UOB's stock price outperformed that of DBS, presumably because of its lower China exposure and the vast Asean business franchise which it has developed.
But the CIMB analysts said: "After the year-to-date outperformance, we reckon that UOB will now lag."
They have also turned positive on OCBC, which is acquiring Hong Kong's Wing Hang Bank to expand its outreach in China, because of the lender's rising loan spread and sustainable loan growth.
But traders are mindful that getting hitched to China's growth bandwagon can be a double-edged sword, since sentiment can suddenly turn sour if there is a sudden negative flow of news out of the mainland.
It was only recently that concerns were raised over a possible bad debt crisis in the Chinese banking system, following the default on a bond payment by a mainland state-owned company.
That, in turn, cast a pall over China lenders listed in Hong Kong and foreign lenders with big China exposure such as HSBC Holdings and Standard Chartered Bank.
In his report, Citi Research analyst Robert Kong said that DBS had confirmed it had analysed its China exposures and "remains wholly comfortable with the quality of the book".
"Our sense is that DBS is enjoying the strongest and the broadest-based business momentum, while UOB is facing more near-term challenges."
Barclays Capital Equity Research's Ms Sharnie Wong noted that UOB reported flat margins as its China growth strategy is more conservative and it is less exposed to China-related trade loans.
Whether that turns out to be a boon or bane as the three lenders pursue their different China strategies, the next few quarters will bear watching.
engyeow@sph.com.sg