Banks brace for tough Q3 after unexpectedly strong second quarter results

On back of lower fee income, higher credit costs.

Singapore’s three largest banks are gearing up for a tough third quarter after posting unexpectedly strong Q2 results, according to a report by Barclays.

Barclays noted that the third quarter will be more challenging for the three banks as the benefit of the higher Sibor has been mostly reflected already, while fee income could moderate post the market drop in Hong Kong and China. Credit costs could also rise amid the tougher economic environment.

“All three banks' management teams warned of economic uncertainty for the remainder of the year. We expect downward pressure on margins due to lower interest rates in China and the ASEAN region outside of Singapore. Most of the benefit from a Sibor have already been reflected in 2Q15, unless Sibor continues to rise, dependant on US interest rate outlook,” Barclays said. 

Both DBS and OCBC managed to beat market expectations on back of higher interest rates and market-related fee income, while UOB missed forecasts due to lower trading and investment gains and mild deterioration in ASEAN asset quality.

"DBS highlighted that it has started to see some early signs of deterioration in Hong Kong and Singapore's SME portfolio although this was offset by the recovery in India. UOB and OCBC saw asset quality deterioration in Indonesia and Malaysia. We expect credit costs to rise going forward from 25bps in FY15E to 42bps in FY17E," the report said.