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Business News/ News / World/  The year is already toast for Singapore Banks
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The year is already toast for Singapore Banks

A record return on equity for DBS masks a dimming outlook for mortgages and deal making. The wealthy are bringing in money, but not taking on leverage.

Customers use DBS Group Holdings Ltd. automated teller machines (ATMs) in Singapore, on Wednesday, July 31, 2013. DBS, Southeast Asia's largest bank, is scheduled to release second-quarter results on Aug. 1. Photographer: Munshi Ahmed/BloombergPremium
Customers use DBS Group Holdings Ltd. automated teller machines (ATMs) in Singapore, on Wednesday, July 31, 2013. DBS, Southeast Asia's largest bank, is scheduled to release second-quarter results on Aug. 1. Photographer: Munshi Ahmed/Bloomberg

Just two months ago, it looked like DBS Group Holdings Ltd. would benefit from panic in the global banking industry, gaining as the super-rich moved some of their money from a collapsed Credit Suisse Group AG to Singapore’s largest lender. But now the flames of turmoil are too close — and burning too brightly — for comfort.

A deepening crisis in the US is threatening to engulf loan volumes and pricing. Bankers in the Asian financial center are grappling with lackluster credit demand both in their home market and elsewhere in the region. To that, add last week’s measures to cool the city-state’s gravity-defying property market, and 2023 is already starting to look like a charred year for DBS.

The bank’s March-quarter earnings, announced after JPMorgan Chase & Co.’s takeover of First Republic Bank, show few signs of stress. Net income increased 43 percent to S$2.57 billion ($1.9 billion) in the three months ended March 31, topping analysts’ estimates. Return on equity surged to a new record, as a high interest-rate environment shored up profitability of commercial loans and a post-pandemic surge in travel supported the credit-card business. The balance sheet benefited from “flight-to-safety deposits," DBS said after the results.

But while fees from wealth management and investment banking recovered somewhat, it’s not clear if the trend will hold. Rich clients are still not increasing leverage, and housing-loan bookings could see “some impact" from the latest doubling of stamp duties on purchases by foreigners, Chief Executive Officer Piyush Gupta said in a presentation. At 2.12 percent in the first quarter, net interest margins have likely peaked, even though they may stay above 2 percent for the full year, he said.

Within the bank, the mood is decidedly cautious. After thinning down its loan-loss cushion in the December quarter, DBS again puffed it up as “a prudent measure." That’s probably just as well. Few analysts are confident that First Republic’s failure, the second-biggest in American history, marks the end of tumult. To be sure, Singapore’s three homegrown banks — DBS, Oversea-Chinese Banking Corp. and United Overseas Bank Ltd. — aren’t too close to the fault lines. As the Monetary Authority of Singapore said in its April economic review, the island’s financial institutions have “large corporate-heavy and Asia-centric loan books with minimal exposure to the tech start-up ecosystem." Less than 20 percent of their assets are in bonds, compared with 55 percent for Silicon Valley Bank, which went bust in early March.

Yet, the Singapore regulator didn’t sound an all-clear. “Should other latent vulnerabilities in the global financial system manifest in the coming months, consumer and investor confidence will take a further hit, with wider adverse implications for the economy beyond the current manufacturing-led downturn," MAS said.

In normal times, DBS investors would be more than impressed by a return on equity of 18.6 percent. But the sentiment boost from Credit Suisse customers’ rush to safer havens is fading. With JPMorgan Chase & Co. also garnering 18 percent returns for shareholders, and CEO Jamie Dimon’s takeover of First Republic being touted by analysts as the biggest American bank’s best acquisition in decades, the spotlight is moving away from Asia. That isn’t altogether a surprise. So far, China’s reopening has been mixed. Confidence is weak across emerging markets, while credit growth in most parts of the continent is less than stellar — the only big exception is India. The Singapore bank’s shares have fallen nearly 3 percent in US dollar terms so far this year; JPMorgan’s stock has risen more than 5 percent. 

As profitability of loans peaks and credit volumes are pinned down by weak business demand and efforts by the Singapore government to rein in foreign homebuyers, fees will have to do more for earnings. But investment banking doesn’t hold out much hope: Morgan Stanley is embarking on a fresh round of about 3,000 job cuts, Bloomberg News reported just before DBS’s earnings announcement. The capital deployed in Asian banks may be thick enough to not get singed by the flames burning far away from its shores. Yet, for regional lenders like DBS, 2023 may already be toast.

(Andy Mukherjee is a Bloomberg Opinion columnist covering industrial companies and financial services in Asia. Previously, he worked for Reuters, the Straits Times and Bloomberg News.)

 

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Published: 02 May 2023, 09:47 AM IST
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