Chart of the Week: Singapore banks' ROEs to trend higher into FY18-19E

Maybank Kim Eng outlines three reasons behind this forecast.

Singapore banks' ROEs are expected to remain at current levels or trend higher into FY18-19E. Maybank Kim Eng's assumptions are centered on the following:

1) Lending opportunities: momentum likely to sustain into 2H17 and our loan growth expectations of 8-9% YoY are ahead of management’s guidance of mid-single digit growth for the year;

2) Non-interest income (non-II): Could lift banks’ revenues as we expect buoyant market conditions into 2H17. Key drivers of non-II could come from wealth management (WM) fees and trading income.

We think Singapore banks’ wealth franchise could benefit as Asia Pacific will be one of the fastest-growing regions for wealth. In addition, OCBC could stand to benefit from subsidiary Great Eastern’s (GE) higher contributions in favourable market conditions. GE’s non-operating profits surged 262% YoY in 1H17 to SGD118m (1H16: -SGD73m);

3) Provisions: provisions from the O&G sector will remain elevated into FY17-18E, especially as industry dynamics deteriorate. However, we think UOB is ahead of peers in terms of provisioning. Despite having the lowest level of O&G exposure, UOB’s specific provisions of average gross loans loans remained high at 30bps, vs peers’ 19-39bps.