Despite headwinds, local banks likely to remain profitable

UOB took action in provisioning at the group level for subsidiaries that might not have had to transition to IFRS 9 in FY2018. These included those in Indonesia and Thailand.

Similarly, DBS’s chief financial officer Chng Sok Hui says the bank had transitioned to IFRS 9 in 2018. “When we implemented IFRS 9, it was a group-wide standard, and it didn’t matter which country goes on to IFRS 9 next year. When the Indonesian subsidiary moves to IFRS 9 on Jan 1, 2020, that will have already been catered for,” Chng says.

Single-digit growth next year

The banks’ growth plans centre around their ongoing digital transformations. According to Gupta, DBS’s digital bank, digibank, was recently launched in Hong Kong and targeted the affluent market. “We are relatively upbeat about digibank in Hong Kong,” he says.

When asked if he planned to acquire Bank Permata in Indonesia, Gupta declined to answer. However he outlined what DBS looks for in an acquisition. First off, it must not distract the bank and its management from its focus. “Our key agenda is digital transformation and organic growth. Anything that distracts us from that, we will not be interested,” Gupta says. Hence, in size, it should be no more than 5% of DBS’s market cap. Of course, the acquisition needs to make strategic sense in terms of DBS’s growing the lines of businesses, and must be accretive in a reasonable period of time.

Tsien says Indonesia is an important market. “Bank OCBC NISP’s market share five years ago was 1.7% and now it’s 2.3%. We do have expectations that earnings from Indonesia as a percentage of group earnings will continue to expand.”

He expects low single-digit loan growth in 2020, along with the narrower net interest margin that OCBC has achieved this year. For the first nine months, NIM averaged 1.77%. “We believe NIM will gradually come down if interest rates come down. We are not only talking about US interest rates, we are also talking about regional interest rates,” Tsien says. Indonesia’s lending rates have been reduced three times in the past four months, and Malaysia has also reduced its board rate once in 3Q.

“A lower interest rate environment is to encourage demand for loans. We hold quite a bit of operating balances [loans], so we will not be able to earn as much as before,” Tsien cautions.

UOB guided for mid-single-digit loan growth in 2020, NIM that is 5 to 10bps lower than the 1.79% achieved year to date and credit costs in the range of 20 to 25bps.

DBS is guiding for low single-digit loan growth, NIM that is around 7bps lower than the 1.9% achieved this year and credit costs at 21bps. Gupta says DBS should be able to achieve 4% growth in income and net profit in 2020.

All in all, given the environmental headwinds, UOB and OCBC should still be able to clock more than $1 billion in earnings a quarter, and DBS is likely to report almost $1.7 billion a quarter, leaving them room to keep dividends flowing and underpinning book values and share prices (see Table 2). E