S’pore banks to face new risks with growth: Fitch

SINGAPORE – While growing regionally helps Singapore’s three largest banks diversify their revenue streams, such a strategy brings about greater challenges such as regulatory complexities and emerging-market risks, Fitch Ratings said yesterday.

Expanding regionally is a “natural development” for the three banks — DBS, Oversea-Chinese Banking Corp (OCBC) and United Overseas Bank (UOB) — given the size limitations of the domestic market and open nature of Singapore’s economy, the ratings agency said. This strategy also allows them to benefit from cross-border trade, greater integration of the Association of Southeast Asian Nations (ASEAN) and rising incomes.

“Growing offshore operations — in foreign currency and in countries with more variable credit cycles — may challenge the banks’ historical funding, asset quality and regulatory oversight strengths,” it said. It added, however, that it believes the three banks have managed such risks prudently.

The three local lenders are among the world strongest banks, with OCBC ranked third, DBS placed ninth and UOB in 10th position on Bloomberg Markets’ annual rankings published last week.

Fitch added: “Rising income in the region also creates broader fee revenue opportunities, such as in wealth management, bankassurance, payments and transactions, and capital-markets services. Pursuing growth opportunities in non-lending activities will require continued product and technological innovation, as banks are likely to face intense competition from foreign players and non-bank institutions.”

CMC Markets analyst Nicholas Teo said given that all three Singapore banks operate in similar geographical zones and compete in similar business areas, “they are equally vulnerable to any significant slowdown in the regional economy and are, likewise, equal beneficiaries of any rising tide that a recovery in the economy may bring”.

The comments came only days after the local lenders turned in a mixed second-quarter report card. Singapore’s largest and second-largest banks DBS and OCBC surpassed expectations to respectively register S$1.12 billion and S$1.05 billion in net profit, up 15 per cent and 14 per cent year on year.

During the same period, their smaller rival UOB reported that earnings had fallen 5.7 per cent to S$762 million.

Barclays’ analyst Sharnie Wong said besides the rise in the Singapore Interbank Offered Rate, DBS and OCBC benefited also from the stock rally in Hong Kong and China, which drove market-related fee income growth.

Ms Wong said the near-term outlook for the banks is more challenging as fee income could moderate after the recent market slump in Hong Kong and China.

“All three banks’ management teams warned of economic uncertainty for the rest of the year … We expect downward pressure on margins due to lower interest rates in China and the ASEAN region outside Singapore,” added Ms Wong.