[SINGAPORE] The Republic's banks reported unexpectedly strong results in the second quarter despite volatile market conditions, but warned that the outlook for the rest of the year is highly uncertain.
Interest margins, which had shown signs of recovery in the first three months of the year, buckled under renewed pressure at all three banks, with little hope of improvement later this year.
But though the outlook for growth is subdued, there was no sign of trouble in the banks' portfolios, with non-performing loan ratios at or near all-time lows of around one per cent.
Trading and investment income at all three banks was sharply lower in the April-June quarter, compared to the first three months of the year, as market conditions deteriorated. Their combined non-interest income slid 20 per cent to $1.85 billion, from $2.3 billion in Q1.
OCBC Bank suffered the largest drop in non-interest income over the quarter, despite recording the biggest gain in fees and commissions from wealth management and other services.
Its fee income rose 16 per cent to $317 million in Q2, from $274 million in Q1, but that was more than offset by a steep fall in trading and investment income, and sharply lower contributions from life-insurance subsidiary Great Eastern, whose quarterly profits are highly sensitive to market price movements.
United Overseas Bank (UOB), too, earned higher fees and commissions compared to Q1, which offset the drop in trading and investment income. Overall, its non-interest income performance was the best in Q2 - flat compared to Q1 and 20 per cent higher than a year ago.
DBS Group's fee income was hurt the most, with investment banking and other fees sliding sharply during the quarter as companies such as racing group Formula One and football club Manchester United put off their plans to list here.
Net interest income at all three banks also declined compared to Q1, as the squeeze in net interest margins offset growth in loans. The banks' combined net interest income slid one per cent over the quarter to $3.24 billion.
DBS grew its customer loans most quickly over the three months to end-June, expanding its loans by 4 per cent to $205.2 billion. Its net interest margin, the narrowest of the three banks', shrank the least - by 0.05 percentage point - to 1.72 per cent.
OCBC's net interest margin contracted the most, shrinking by 0.09 percentage point to 1.77 per cent.
Despite the squeeze in interest margins and the difficult trading environment, all three banks' Q2 earnings surpassed analysts' expectations. Overall, the banks' combined net profit slid 11 per cent over the quarter to $2.17 billion. Compared to a year ago, net profit was 11 per cent higher.
But business conditions are likely to stay difficult for the banks for the next six months at least. Loan growth is now likely to fall to an annual pace of 10 per cent or less this year, compared to earlier projections of over 10 per cent, the chief executives of DBS and OCBC warned last week, citing slower growth in Asia.
"I think the rest of this year is going to be very, very uncertain," said DBS chief executive Piyush Gupta.