Singapore Bank earnings and the scope for growth in digital banks

Strong UOB earnings setting up a strong read-through for other banks

The three traditional Singapore banks have already started to report earnings for the September quarter, with UOB reporting on October 28. Net income rose 34% to a record S$1.4 billion from a year earlier in the quarter, while net interest income rose 39% to S$2.2 billion, led by margin expansion and loan growth. NPLs and provisions eased, and the stock is up 7% since the earnings announcement.

The report has set up a positive read-through for other ban earnings as well, with DBS due to report tomorrow (November 3) followed by OCBC on November 4. While global macro conditions remain challenging, Singapore banks are positioned to deliver strong net interest margins and stable asset quality despite a hit to wealth income and trading/investment income amid the challenging environment. Meanwhile, regional reopening is helping as well as credit card fee picks up.

Regional expansion has also been a key theme for Singapore’s banks, and improved dividends as well as further upside potential can be expected going into the next year. UOB has bought consumer assets of Citigroup in four countries, with the takeover in Thailand and Malaysia completed while that in Vietnam and Indonesia to be wrapped up by the end of next year. Meanwhile, DBS could continue to expand its Asian footprint after the S$2.2 billion purchase of Citigroup's consumer-banking business in Taiwan, acquisition of Lakshmi Vilas Bank in India and 13% stake in Shenzhen Rural Commercial Bank.

Threats from new digital banks

A wave of new virtual banks backed by some of the key tech giants Grab and legacy lender Standard Chartered have launched recently in Singapore. However, this is unlikely to post a threat to the traditional banks as consumer adaptability will be slow due to the caution around complete reliance on digital banking with newer players and the risks associated with data security. While digital banks may start to see some use, it is unlikely to displace the traditional banks in the near future. Meanwhile, traditional banks themselves are digitizing in a big way, led by DBS. This means pureplay digital bank players will need to offer highly differentiated offerings or extremely competitive pricing to attract consumers.