Big three banks to average 38% fall in Q1 earnings: analyst

Margins are expected to shrink 6-10bps compared to Q4 2019.

Singapore’s big three banks are expected to post an average 38% YoY fall in earnings in Q1 on the back of spiking credit costs and falling credit card income, according to a report by Jefferies.

Meanwhile, the banks’ non-interest income is expected to contract by 6-13% YoY, whilst revenue for the three banks will fall 2-4% YoY, due to falling card income, wealth management income, and weak stock prices.

Whilst system loans and deposits grew 3.5% and 4.9% YTD respectively, pushed by business loans and cash deposits, the exodus of business volumes may push margins to shrink by 6-10 bps QoQ, according to Jefferies analyst Krishna Guha. Of the three banks, DBS is likely to report the largest decline in margins whilst OCBC will report the least, given the loan re-pricing thanks to recent rate cuts.

Although liquidity remains ample, banks have cut deposit rates by close to 100bps in March, he further noted.

“In addition, anecdotally, we understand spreads are getting wider. Impact of these on margins are likely to be seen from next quarter but may be offset by lower margins in the region as regional central banks have been a lot less aggressive so far in lowering rates in this cycle compared to Fed moves, especially in March,” said Guha in a media note.

Card income is forecasted to negatively impact 15-20% of the three banks’ total fee income for the quarter. Meanwhile, income related to wealth management and capital markets are also forecasted to fall to Q4 2018 levels, with UOB showing the most resilience on wealth management revenue compared to DBS and OCBC.

Weak stock prices will also impact overall trading income, although this will be partially offset by debt capital markets.

Further adding pressure is the much higher credit cost of around 60-100 bps expected in Q1, driven by impact of oil and gas commodities and exposure to small and medium enterprises (SMEs).