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Analysis: Bottoming out - Singapore banks' earnings upgrades signal turning point for sector

SINGAPORE (Reuters) - Singapore banks are seeing a sharp upgrade to next year’s earnings estimates as wealth management fees surge and losses on coronavirus-related loans ease, pointing to a recovery in Asia’s banking industry.

FILE PHOTO: A view of the central business district in Singapore May 24, 2018. REUTERS/Edgar Su

Net income estimates for DBS DBSM.SI, Oversea-Chinese Banking Corp OCBC.SI and United Overseas Bank UOBH.SI for 2021 have risen by 8% on average over the past 30 days, the highest among Asian banks, Refinitiv data showed.

The recovery could offer a template for global lenders scrambling to find new income sources amid rock-bottom interest rates. Moderate COVID-related loan losses due to timely repayments also underpinned the optimism, fund managers said.

The local banks reported lower-than-expected declines in quarterly profits last week, supported by gains in wealth management fees. Credit costs at DBS and OCBC fell from the second quarter.

“The latest round of results was most significant for providing the first hint of the resiliency of the banks’ loan books as they exit loan moratorium programs in different countries, ” said Xin-Yao Ng, Asian equities investment manager at Aberdeen Standard Investments.

Ng said Aberdeen’s view of Singapore banks had changed to “broad optimism” from “selective”.

The city-state’s lenders, which count Southeast Asia and Greater China among key markets, had rolled out billions of dollars in loan moratoriums this year but loan deferrals are slowly ending in Malaysia and other markets.

BofA Securities raised Singapore banks’ 2021 earnings per share estimates by 10-40% last week, citing an improving credit outlook and fee momentum. CGS-CIMB analysts upgraded the sector to overweight from neutral, saying 2020 was “a wash-out year for earnings and the market is prepared to look past that, in our view.”

By contrast, larger Asia-focussed Standard Chartered STAN.L warned last month it would take longer to hit a key profitability target, while HSBC HSBA.L signalled it would overhaul its business model.

DBS shares have advanced 44% from multi-year lows struck in March while OCBC and UOB are up more than 20% over the same period but all three are still down on the year.

Asian banks' profit estimates change:

BANKING ON THE WEALTHY

Managing the wealth of the rich in volatile markets is becoming a particularly profitable and fast-growing business.

In the third quarter, OCBC’s wealth management franchise had its best quarter since 2018, while DBS’s overall fee income jumped 17% year-on-year to clock its third biggest rise on record and reach pre-COVID levels. UOB’s wealth business also improved.

“Double digit growth in fee income next year is also quite realistic based on the overall momentum that we are seeing,” DBS CEO Piyush Gupta told reporters last week.

This is expected to partly offset the margin squeeze lenders face as interest rates remain low and as the pandemic drags down loan growth.

Analysts are also hopeful the expected earnings pick-up will help Singapore banks to pay out higher dividends, making them even more attractive.

Investors say the odds that the central bank will remove regulatory caps on dividends imposed earlier this year had risen.

But some fund managers remain cautious as Singapore’s economy shrank 7% in the third quarter.

“We have yet to see the full extent of the pandemic’s impact on the economy, hence we maintain a moderate negative outlook for the three Singapore banks,” said Shao Keng Ang, fixed income portfolio manager at Eastspring Investments.

Reporting by Anshuman Daga; Additional reporting by Gaurav Dogra in Bangalore; Editing by Sumeet Chatterjee and Ana Nicolaci da Costa

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