Singapore banks feared to suffer 10% drop in underlying profit

Blame it on lower client activity.

Barclays has noted that the reporting season for Singapore banks starts on 31 July with UOB followed by DBS on 1 August and OCBC on 5 August, and that it expects sector underlying profit to rise by 7% y/y but fall 10% q/q.

According to a research note from Barclays, the forecast of the decrease is due to seasonally lower client activity, trading gains and mild margin pressure q/q on China-related exposure.

The report also said that other operating trends are expected to remain largely stable with 2-3% loan growth q/q and sound asset quality.

Here’s more from Barclays:

Slight margin pressure: We expect margins to be under some pressure q/q, especially for DBS and OCBC, which benefited from liquidity tightness in China in 4Q13/1Q14.

China’s interbank rates have since eased with SHIBOR falling from an average of 5.5% in 1Q to 4.75% by end-June 2014, which should result in lower yields on loans, trade finance and interbank placements. We estimate loans grew 2-3% q/q in 2Q14, largely led by corporate and offshore loan demand.

Steady fee income growth: We expect steady fee income growth (2-3% q/q) to be led by loans/credit cards, trade-related fees and some improvement in market-related income (Singapore stock market daily average turnover rose 3% q/q). However, we expect trading and investment gains to moderate q/q.

Key themes to watch: 1) Margin outlook on China-related business and the rest of the region; 2) view on deposit competition and tightness in system liquidity conditions; 3) loan growth expectations, especially on corporate loans which may surprise on the upside, while other ASEAN loans may slow (e.g. loan demand affected by political uncertainty); and 4) update on revenue synergies and capital plans for Wing Hang Bank’s integration into OCBC.