The full-year results of the three Singaporean banks tell us plenty about the challenges that are facing institutions in the shadow of the US-China trade war.
Singapore was always likely to be a bellwether for the impact of issues in global trade. It is the ultimate hub, for everything from shipping to private banking; it is a place of ease through which things both physical and virtual move. Any dent in the willingness of people to transact is going to hit Singapore. So is any slowdown in China.
There is no reason for alarm yet. All three banks recorded impressive full-year net profit growth in 2018: OCBC by 11% to S$4.49 billion; DBS by 28% to S$5.625 billion; and UOB by 18% to S$4.01 billion. All three are record figures. Only one of the three – OCBC – registered a decline in fourth quarter numbers year-on-year.
But each result has something in the background reflecting a more challenging environment.
At DBS, it was the treasury markets division, where income declined 21% year-on-year, and where fourth quarter income halved to S$92 million, the lowest figure on record. This reflected difficult market conditions and people being unwilling to transact amid such uncertainty.
At OCBC, it was the drop in the overall fourth quarter number, and the underlying reason behind it: a plunge in the earnings contribution from its insurance arm, Great Eastern Holdings. That 70% drop in net profit contribution year-on-year was, in turn, due to unrealized mark to market losses in the insurance arm’s investment portfolio. Non-interest income for the quarter fell 32% year-on-year because of that drop in Great Eastern income, and wealth management fees also fell.
And at UOB, it was the drop in ‘other non-net interest income’ (a category which excludes fee income), down 20% year-on-year for 2018, and down 46% year-on-year in the fourth quarter. This was due to unrealized mark to market on investment securities.
Spot the common theme?
Numbers like these tell us that the problem isn’t – yet – really about declining trade. Instead, it’s about the hit to sentiment caused by the idea of declining trade. DBS’s numbers weren’t hit in trade finance. They were hit in the treasury and markets division, and more specifically, in the trading of securities. Both OCBC and UOB were hit by the value of portfolios held with businesses such as insurance subsidiaries. These are markets issues, not trade issues.
In fact, the Singaporean banks looked pretty robust in everything except income that relies on other people’s good moods. The dull and steady stuff is still dull and still steady.
UOB grew gross customer loans 11% year-on-year, and its group CASA level has 8% compound annual growth rate since 2014. Assets under management at OCBC’s private banking subsidiary, Bank of Singapore, crossed US$100 billion, and the bank’s total dividend payout went up 17% year-on-year. DBS’s return on equity, at 12.1%, has not been this high for a decade. There are actually good news stories across all three institutions.
So the question becomes: do these irksome footnotes in the numbers, the ones driven by bearish outlooks and fickle investors, serve as a prelude to something much more damaging, or are they just a free-standing issue, a headache that will pass?
All three chief executives, and their public announcements, were careful to sound a warning note. UOB CEO Wee Ee Cheong said he expects “ongoing global uncertainties to continue to weigh on business sentiment in the near term”; Samuel Tsien, CEO at OCBC, said loan growth would slow in the year ahead, with more volatility to come in Asian markets, and that both trade flows and overall liquidity had reduced; Piyush Gupta at DBS spoke of a synchronized economic slowdown.
Gupta also pointed out that a popular narrative – that global supply chains seeking to avoid China would simply reroute through different bits of Asia, tempering the impact on trade flows in the region – is a little too simplistic: it takes a long time and a lot of commitment to close a factory in China and set up a new one in Vietnam.
Singapore’s banks are well-run, diversified and efficient. They are not about to hit the wall. They have worked hard on new engines of growth: DBS in its across-the board technological reinvention; UOB, now, in an Asean-wide digital bank roll-out; OCBC through Bank of Singapore and its commitments to SMEs across the region.
But there is an argument that the best times, in the medium term, are behind them: that the combination of trade tensions, rising global interest rates, volatile asset prices, spooked high net-worth investors and the steady incursion of non-banks into the low-hanging fruit of financial services are going to make it steadily harder for Singapore’s big three to keep growing so consistently.
Will they manage it? Stay tuned. The May edition of Euromoney will feature interviews with Wee, Gupta and Tsien – all three CEOs of Singapore’s banks. They have plenty to say.