3 biggest threats to Singapore banks' 2014 earnings outlook

Fears rise over Asian market deterioration.

According to Credit Suisse, 1H13 was marked by record profits for Singapore banks driven by better-than-expected strength in non-interest income and loan growth.

But the macro-economic environment in their core markets (primarily Singapore+ASEAN+India) has seen a visible deterioration over the past few months, thereby increasing earnings risks.

It noted that "while we are unlikely to see significant impact in 2H13, risks to 2014E earnings have increased."

Here's more:

Three key earnings risks in the near to medium term

Loan growth: Singapore banks’ strong overall loan growth has been helped by a renewed strength in regional trade finance, offshore corporate loan bookings and steady mortgage growth in Singapore.

However, with further downgrades to regional GDP growth estimates and an imminent slowdown in mortgages, the risks are to the downside in the next few quarters.

Net interest margins: Investors now appear more optimistic about a potential NIM recovery. We believe the consensus might be getting too bullish about FY14 NIM prospects given: (1) ASEAN loan growth being bound to slow along with further NIM pressure, (2) continued SGD funding competition and (3) stress in USD funding markets.

Credit costs: We have probably seen the bottom for this cycle in terms of credit costs. Singapore banks’ managements now expect a normalisation in credit costs going into 2014.

Given the historical low net interest margins, profit sensitivity to higher credit costs is now probably higher than the previous cycles.