Singapore banks navigate Asean jigsaw

The city-state’s biggest lenders are approaching regional economic integration on the back of soaring profits.

Singapore’s biggest banks are grasping Asean economic integration with gusto as a growth opportunity.

The formation of the Asean Economic Community, expected by the end 2015, will remove restrictions on trade, investments, capital and people flows, providing opportunities for the region’s lenders.

DBS, Overseas-Chinese Banking Corp and United Overseas Bank – the Lion City’s three biggest banks – are better positioned than most, posting the biggest profit of Asean’s 100 largest banks in 2014, according to FactSet.

However, China’s economic slowdown muddies the picture and growth at home is slowing. China’s growth slowed to 7.4% last year from 7.7% in 2013, while Singapore’s economy expanded only 2.8% in 2014, compared with 3.9% in 2013.

“In the medium term, Singapore banks will have to look to South Asia for sustainable growth,” said Harsh Wardhan Modi, JPMorgan analyst. “Asean banking integration, if and when it happens, should benefit them.”

Singapore’s banks are expanding around the region via acquisitions.

Besides the recent $5 billion purchase of Hong Kong’s Wing Hang Bank, OCBC also acquired Netherlands-based ING’s Asian private banking unit, which it operates as Bank of Singapore.
“Last year’s successful acquisition of Wing Hang Bank” helped profits, said Samuel Tsien, group chief executive at OCBC.

DBS, meanwhile, in October bought the private banking arms of Societe Generale in Singapore and Hong Kong, as well as some of its trust business, for $220 million.

“Regional expansion remains a key strategy for the banks as they seek to diversify their earnings bases,” said Elaine Koh, a banking analyst at Fitch.

“At the same time, such a move also presents new risks and hence increases their risk profiles slightly,” Koh said, adding that regulatory, market and legal infrastructure in some emerging countries may not be as sound or as mature as those in Singapore.

An economic slowdown in China could be an added risk for Singapore’s banks as they have enlarged their credit exposure there in the recent years.

DBS reported a S$7 billion decline in first-quarter trade loans from the previous quarter, while OCBC posted a S$1.9 billion quarter-on-quarter drop in trade loans. Both said the majority of the drop was linked to China.

However Piyush Gupta, chief executive of DBS, was optimistic: “There is growing consumption, trade and investment in China and the economic energy remains palpable,” he said.

UOB, which has the least exposure to Greater China compared to the other two, has not released data on its China-related trade loans, although its overall Greater China lending fell quarter-on-quarter.

“We are operating in a challenging macroeconomic environment,” said Jimmy Koh, head of investor relations and research at UOB Group. “China’s economic growth is key to Asean’s economic growth.”

Banking integration

Regardless of what happens to China, Singapore’s banks are looking at Asean for growth opportunities and, as the region prepares for economic integration, the three banks are on a sound footing with their impressive networks.

“An integrated banking sector will improve the stability of the Asean banking industry and encourage the emergence of globally competitive Asean-based banks,” Gupta said.

OCBC and UOB are present in 8 out of the 10 markets that make up Asean, while DBS is in 7. 
“The elimination of trade restrictions will lead to increased cross-border interaction,” said Tsien. “This means more opportunities for banks to provide trade services. Better market access and increased market liquidity will promote more capital market activities.”

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