2 biggest factors that could affect Singapore banks' third quarter earnings

Are there still fears over falling bond prices?

According to CIMB, its prior fears about Singapore banks’ earnings had been spurred by falling bond prices. As bond prices stabilised in 3Q, it believes that the two new themes for 3Q are: 1) softening revenues as Asia trade flows slow, and 2) the impact on lower translated regional earnings.

Here's more:

Singapore banks’ loan and fee growth is gradually less about the domestic economy and more about financing trade, US$ loans, trade fees and regional growth.

As Asian trade slows, there will be earnings drag on all three banks, even if credit costs stays muted. We remain Neutral on the sector, with DBS (Outperform) as our top pick and OCBC (Underperform) as least preferred. 

What Happened 
The Singapore banks will report their 3Q13 results on 1 Nov (OCBC, DBS) and 5 Nov (UOB). 

What We Think 
We expect cumulative sector earnings to be marginally higher (+1% qoq), although the individual banks’ quarterly swings will depend on whether the temporal factors in the previous quarter depressed or augmented earnings.

The key themes for 3Q13 are: 1) the effect of slower emerging Asia trade, and 2) lower translated earnings of regional offices as the regional currencies depreciated against the S$.

On 1), DBS and OCBC had higher US$ loans than UOB and will have more to lose as trade flows ebb. On 2), most ASEAN currencies depreciated against the S$ while the HK$ was flat in 3Q13. IDR fall was particularly acute.

OCBC and UOB both have ASEAN exposure and could see weaker translated earnings from regional ops. Credit quality is unlikely to have deteriorated significantly in 3Q13. 

What You Should Do 
Our order of preference is still DBS (Outperform), UOB (Neutral) and OCBC (Underperform). Asia trade activity had several start-and-stop bouts since 2009, amidst a generally healthy growth trend, we do not view the current slowdown in trade flows as a turning point and are not unduly worried.