Singapore banks' underlying profit predicted to hit 15% growth

Loan growth could disappoint, however.

The 1Q15 reporting season for Singapore banks will be starting with DBS followed by both UOB and OCBC by end-April.

According to a research note from Barclays, it expects sector underlying profit to rise 15% q/q and 3% y/y, driven by a rebound in trading gains and a 1-3bp increase in margins.

Barclays said that key themes to watch for are the following: First, while the interbank rates have risen (3M Sibor +43bp YTD), it expects the benefits of this to be mainly reflected in 2Q and 3Q due to the timing of loan repricing.

Further, Barclays sees downside risk to loan growth, in particular trade-related lending, from lower commodity prices and monetary easing in China, which may result in lower China-related loan demand offshore.

Here's more from Barclays:

Loan growth could disappoint: System loans grew only 1.1% YTD-Feb 2015 as general commerce loans contracted 2.3% according to MAS statistics. We believe loan growth could disappoint vs our 1.3-1.5% q/q estimate for 1Q15, affected by slowing trade finance given the recent decline in commodity prices and monetary easing in China, which could dampen demand from Chinese corporates to borrow offshore.

Singapore property market sentiment remains weak, but the pipeline of primary transactions, where loans are booked on project completion, should continue to support near-term growth in mortgages, in our view.

Margin upside potential: The recent rise in Sibor is positive for banks' margins but we expect the benefit to be reflected mainly in 2Q and 3Q due to the timing of loan repricing.

We estimate margins will increase 1-3bp q/q in 1Q15. This could potentially offset the negative impact from slower loan growth, in our view. Downside risk to our margin assumptions could come from sudden liquidity outflows from Singapore resulting in fierce deposit competition.

Higher trading income: We expect non-interest income to recover q/q on higher trading gains and stronger customer activity in 1Q. We expect steady growth in market-related fee income including stock brokerage and wealth management fees as market turnover rose 11.5% q/q. We forecast fee income to increase 1-3% q/q in 1Q.

Watchful of asset quality: Asset quality conditions are benign, in our view, although we may see pockets of weakness in the SME and China-related loan portfolio. We expect credit cost to normalise upwards over time from the current low levels.

Liquidity coverage ratio (LCR) disclosure: The Singapore banks appear well capitalised and are highly liquid. We expect to see LCR disclosure in 1Q15 for the first time.

The three banks were required to have a SGD LCR of 100% by 1 Jan 2015 and all-currency LCR of 60% by the same date (increasing by 10% every year to 100% by 1 Jan 2019). The three banks have previously said that they can comfortably meet the minimum requirements.