All three of Singapore's banks are expected to see profit declines for the first time since 2016 as they set aside cash for a potential spike in bad loans stemming from the coronavirus-fuelled economic slump.
Net income at each lender probably slid between 21 per cent and 28 per cent in the three months ended March 31 from a year earlier, according to the average estimates of six analysts surveyed by Bloomberg.
DBS Group Holdings, the nation's largest bank, is seen to report the steepest profit drop when it kicks off the earnings season today, while OCBC Bank is forecast to report the smallest contraction.
The pain for Singapore's lenders is set to persist as Singapore braces itself for a sharp economic contraction this year, thanks to the pandemic that is crippling manufacturing, tourism and other services.
Banks are also contending with falling interest rates and slowing loan growth, and the crash in oil prices may trigger defaults among local firms that cater to the energy sector.
"Banks always tend to do badly in the midst of an economic recession," said Ms Tan Min Lan, Asia-Pacific head of UBS Global Wealth Management's chief investment office. The slumping economy will fuel bad loans, squeeze interest margins and slow credit growth, she said.
OCBC and United Overseas Bank will report next week. The last time the trio all posted a profit retreat was in the final quarter of 2016, when many energy-related firms defaulted in the aftermath of an earlier oil slump.
Analysts are predicting a sharp jump in credit costs due to the banks' exposure to the oil, gas and commodities sector and loans to small and mid-sized companies.
The banks had combined exposure of US$680 million (S$962 million) to Hin Leong Trading, the Singapore oil trader that filed for court protection from creditors this month, as of April 9. It is not clear whether the local lenders will have provisioned against Hin Leong by the end of last month.
DBS may have booked a loan-loss buffer of $640 million in the quarter, up from $76 million a year ago, according to Morgan Stanley analysts. They see OCBC's provisions swelling 81 per cent to $451 million, and UOB's more than tripling to $380 million.
Jefferies analyst Krishna Guha expects the banks to book credit costs of 60 to 100 basis points and said guidance will be crucial to understanding the cost trajectory this year.
Analysts expect single-digit declines in net interest margins this quarter, but said loans will be supported by larger companies drawing on commitment lines and banks providing short-term US dollar liquidity last month.
Net interest margins probably shrank only slightly in the quarter because the United States Federal Reserve's interest rate cut came late in the period, Citigroup analyst Robert Kong said in a note.
The banks are expected to give guidance on this year's dividends, with UBS Securities saying cuts are more likely for DBS and UOB than OCBC.
OCBC has "more headroom" to maintain dividends given its higher capital levels and lower current payout ratio, Sanford C. Bernstein analyst Kevin Kwek wrote in a note.
Analysts estimate dividend yield for all three banks to remain between 4 per cent and 7 per cent this year even after earnings decline, supported by Tier-1 capital ratios exceeding 14 per cent.