Three things that could drive Singapore banks' higher ROEs

Analysts see earnings visibility ahead for Singapore banks.

OCBC and UOB’s performance improved whilst DBS posted in the first half of 2017. However, analysts at Maybank Kim Eng forecast that Singapore banks' ROEs will either remain at current levels or trend higher into FY18-19E.

"We see earnings visibility ahead for Singapore banks, but more so for UOB."

Maybank Kim Eng's assumptions are centered on the following:

1) Lending opportunities: momentum likely to sustain into 2H17 and our loan growth expectations of 8-9% YoY are ahead of management’s guidance of mid-single digit growth for the year;

2) Non-interest income (non-II): Could lift banks’ revenues as we expect buoyant market conditions into 2H17. Key drivers of non-II could come from wealth management (WM) fees and trading income.

We think Singapore banks’ wealth franchise could benefit as Asia Pacific will be one of the fastest-growing regions for wealth. In addition, OCBC could stand to benefit from subsidiary Great Eastern’s (GE) higher contributions in favourable market conditions. GE’s non-operating profits surged 262% YoY in 1H17 to SGD118m (1H16: -SGD73m);

3) Provisions: provisions from the O&G sector will remain elevated into FY17-18E, especially as industry dynamics deteriorate. However, we think UOB is ahead of peers in terms of provisioning. Despite having the lowest level of O&G exposure, UOB’s specific provisions of average gross loans loans remained high at 30bps, vs peers’ 19-39bps.