Singapore banks will announce their fourth-quarter results in the coming weeks, concluding a bumpy year marked by economic slowdown, market volatility and plunging energy prices.
Issues surrounding loan growth and credit quality are likely to persist for DBS Group, OCBC and United Overseas Bank, while the ongoing turmoil in China will add pressure to their regional franchises.
The October-December period would hold no pleasant surprises for the banks, analysts told The Straits Times.
Phillip Securities research head Jacky Lee said: "The current economic climate has weakened all loan segments for the banks and loan growth would likely be challenged. Non-performing loans would remain a concern as the offshore and marine, as well as commodity-related sectors, further deteriorated.
"If loan growth slowed down, non-interest income from loan-related services would also weaken. Also, a weak investment and business climate would affect trade and transaction services, while the recent stock market turmoil is expected to affect the wealth management fee income."
Singapore's economy grew by 2.1 per cent last year - the weakest since 2009 - according to advance official estimates. In China, growth last year would be around 7 per cent, its slowest in two decades.
Meanwhile, between the crash in August and the massive sell-off this month, the stock markets have hardly any time to regain their footing. Investor sentiment was rattled partly by the dramatic drop of oil prices, which pared around 34 per cent last year.
The grim environment has spooked businesses and consumers into cutting their borrowing.
Data from the Monetary Authority of Singapore showed a 0.45 per cent year-on-year drop in October bank loans. In November, the drop widened to 0.7 per cent.
RHB Research Institute regional banks head Fiona Leong believes that fourth-quarter earnings will be mixed.
"Overall, we expect sequential decline in the fourth-quarter net profit on higher loan provisions and lower non-interest income (NIM) due mainly to lower investment and trading gains.
"Loan growth would also be muted compared with the third quarter, but stable net interest margins could help maintain the net interest income," Ms Leong said.
In the third quarter, NIMs for the three banks were 1.66 per cent to 1.78 per cent, largely stable compared with the first half of 2015.
The United States Federal Reserve rate hikes may give the margins a further boost, but Ms Leong saw limited upside "as higher lending rates would be partly offset by higher funding costs, given the sharp slowdown in deposit growth".
Alongside earnings concerns, asset quality will be another key issue to manage.
Non-performing loan ratios have either stayed put or crept up in the third quarter, to between 0.9 and 1.3 per cent.
The banks will be hard-pressed to improve these ratios, particularly for the parts of loan book exposed to the struggling commodity and offshore marine sectors.
Singapore banks have around 7 to 10 per cent loan book exposure to the oil and gas sector, but the trio have repeatedly stressed that there is no systemic risks.
These concerns will continue to linger, NRA Capital research head Liu Jin Shu said.
"Some banks have written down their investments or loan assets in oil and gas companies at the end of the fourth quarter due to the drop in oil prices.
"Likely, these write-downs will recur in 2016's first quarter," he said.
The banks are also reorienting their loan portfolios towards other growth industries, with a strong interest in the technology sector, Mr Liu added.
At the same time, China's economic and market issues will stay in the fore, particularly for DBS and OCBC due to their larger footprint in the country.
RHB Securities' Ms Leong said: "Given that China is Singapore's biggest trading partner, the slowing China economy has led to lower exports and reduced trade flow between the two countries. As a result, demand for trade-related loans has come off.
"We believe DBS and OCBC would be most affected because of their greater exposure to China. DBS has the highest exposure with loans to Greater China at 35 per cent of total loans.
"For OCBC, the Greater China loans account for 32 per cent of the total, and UOB's exposure is only 12 per cent."
NRA Capital's Mr Liu added: "In hindsight, UOB's more cautious approach towards expansion - by steering from mergers and acquisitions - now seems smart."
This is a reference to OCBC's aggressive move to expand in Greater China via the acquisition of Wing Hang Bank.
DBS will announce its fourth- quarter results on Feb 22, UOB on Feb 16 and OCBC on Feb 17.
This article was first published on January 19, 2016.
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