Wealth business seen boosting earnings prospects for Singaporean banks

SINGAPORE: Singaporean banks are likely to see strong revenue from wealth business bolstering their profits this year, with improving economic prospects also expected to cushion the impact on their interest margins hovering near record lows, analysts say.

Wealth management has emerged as a rare bright spot for the global banking sector, hit by the COVID-19-induced economic downturn and sharply lower lending rates, helping them book higher client advisory fees as well as robust trading income.

Singapore has benefited in recent years from its status as a stable base to set up family offices and investment structures for the world’s wealthy, providing a lucrative business for local banks including DBS Group and OCBC.

“Relative strength in wealth management should offset weakness in cards and loan-related fees for the past quarter,” said Krishna Guha, an analyst at Jefferies, referring to the Singaporean lenders.

“We await guidance on wealth management assets under management growth for 2021 but positive market sentiment should augur well for transactional fee stream,” he said.

DBS, Southeast Asia’s biggest bank, and peers OCBC and UOB are expected to post lower net profits in the fourth quarter ending December versus a year ago. All three are also expected to see full-year profit declines in 2020 for the first time in three years, mainly due to higher bad loans provisioning.

The banks’ net interest margins (NIM) are expected to remain near record lows or dip slightly to between 1.5% to 1.54% in the fourth quarter, according to Refinitiv data, as demand for loans from corporates remained sluggish due to the pandemic.

Double-digit growth in wealth management business over the past five years has enabled this segment to account for the biggest chunk of net fee and commission income for Singapore banks as of end-2019.

CIMB analysts Andrea Choong and Lim Siew Khee said in a report that while margin compression had slowed as banks reap the benefits of lower funding costs, clear guidance in methods to expand NIMs by targeting client segments with higher risk-returns could differentiate banks performances.

“As it stands, banks have been relying on wealth and treasury segments to offset net interest income reduction,” CIMB said.

DBS is set to report net profit of S$1.02 billion ($764.7 million) on Wednesday for the fourth quarter, down 32% from a year ago, according to the average estimate of four analysts, Refinitiv data shows.

Analysts will look for details on its strategy to turnaround distressed Indian lender Lakshmi Vilas Bank, which it took over in November. OCBC’s net profit is set to weaken 24% from a year ago while UOB’s net profit is set to fall 29%, Refinitiv data shows.