Minimal impact on local banks from MAS rules: Analysts

Minimal impact on local banks from MAS rules: Analysts
PHOTO: Minimal impact on local banks from MAS rules: Analysts

SINGAPORE - Singapore's three local banks face a minimal impact on their earnings from the move by the Monetary Authority of Singapore (MAS) to require them to set aside extra reserves with the regulator for a one-year period, analysts say.

But adhering to other strict new guidelines aimed at ensuring that banks stamp out attempts to fix key financial benchmarks could be a drain on management, according to the banking analysts.

Last Friday, MAS did not spare the rod when it proposed tough new laws to criminalise and penalise banks which attempt to manipulate financial benchmarks such as Sibor, a rate used to set home loans, for example.

The regulator has ordered 19 of 20 banks found to have fallen short of expected standards to park extra funds ranging from $100 million to $1.2 billion with MAS while the banks step up their house cleaning. The exception was Commerzbank.

The funds, which will generate no interest for the banks, need to be deposited within a month. The banks also need to report their progress to MAS every quarter and conduct independent reviews to ensure the efficacy of the remedial measures.

"We do not expect the impact on Singapore banks to be material given that they have non-restricted balances, which are in excess of mandated statutory reserves required by central banks," said UOB KayHian analyst Jonathan Koh. These non-restricted monies could be used to fulfil the additional statutory reserves required by MAS.

Of the three local banks which are also among South-east Asia's largest lenders, OCBC Bank needs to set aside a higher amount of between $700 million and $800 million with the MAS.

DBS Group Holdings and United Overseas Bank (UOB) each need to park between $400 million and $600 million.

CIMB Singapore research head Kenneth Ng said the amounts involved do not make up a significant portion of these banks' assets - not more than 0.4 per cent of their assets.

As such, the impact on earnings and net interest income will not be material, even more so in a low-interest rate environment.

There is however an opportunity cost, albeit small, as these funds parked at MAS could have been deployed elsewhere, such as in bonds or the money market in line with banks' endeavour to maximise returns.

Jefferies analyst Krishna Guha expects limited impact on the earnings per share of these banks as a result of not being able to earn income from these funds.

"Assuming net interest spread for DBS, OCBC and UOB of 170 basis points, 175 basis points and 200 basis points respectively, this would impact our estimated net profit for financial year 2013 by 0.2 per cent, 0.3 per cent and 0.5 per cent for the three banks," he said in a note.

Opportunity cost aside, banks could also incur additional compliance costs in their bid to improve the processes.

UOB shares rose eight cents to $20.35 yesterday while DBS shed 11 cents to $15.88 and OCBC lost two cents to finish at $10.13.

UOB KayHian's Mr Koh continues to recommend that investors accumulate these banking stocks that have lost some ground in the bruising sell-down of recent weeks in the stock market.

Two big factors drive his view - stabilisation in the macro outlook and attractive valuations.

anitag@sph.com.sg

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