LOCAL banks have lately not had much good news. Inflationary pressures at home threaten to undo the benefits of a still growing economy as consumers cut back on spending. In the region, political risks have risen considerably as people battle hunger caused by higher food and fuel prices.
Price pressures remain the biggest worry for Asia, where high inflation is threatening to spoil the gains achieved against poverty over the last two decades, the Asian Development Bank (ADB) said on Sunday.
Asian currencies are weakening and asset markets are being strained by worries that rising inflation could soon hurt growth, investment and corporate earnings, and destabilise governments.
Deutsche Bank Private Wealth Management said in a recent report that aggressive monetary tightening is required in Indonesia, the Philippines, India and Vietnam; and, to a more limited extent, in Thailand and Malaysia.
'This could hurt equity prices in these peripheral markets,' Chua Hak Bin, the Asian investment strategist at the private bank, said in the report.
He did highlight the differences of Taiwan, Singapore, China and Hong Kong as markets that have been less hit by oil prices and where monetary tightening would be more limited in future.
The three local banks - DBS Bank, United Overseas Bank (UOB) and OCBC Bank - have varying degrees of exposure to these peripheral markets. UOB and OCBC last year invested in Vietnam banks, but relative to their assets, the amount is tiny and insignificant. Their exposure to Indonesia is bigger but it is their much larger stakes in Malaysia that will provide anxious moments.
Ng Wee Siang, a BNP Paribas analyst, said Malaysia accounted for an average 23.3 per cent of OCBC's 2004-07 pre-tax profit compared with 10.4 per cent at UOB. The variance lies in Great Eastern's significant presence in Malaysia. Great Eastern, OCBC's unit, is the leading insurance firm in Malaysia.
Political risk in Malaysia has risen after the government raised petrol prices 41 per cent this month. Individuals and small and medium enterprises are going to be hit as inflation bites hard.
At DBS, the earnings contribution from its South-east Asia neighbours is less than 7 per cent.
Still, as the local banks' offshore ventures give headaches to their management, the home situation is not all gloom.
Inflation pressure in Singapore, no less worrying at 6.6 per cent - a 26-year high - is one of the factors causing long bond yields to spike.
'Bond yields have risen across the world, not just in Asia. This is positive for banks to the extent they borrow short and lend long,' said Credit Suisse.
Also, corporate lending is linked to capital market yields, so the banks will enjoy wider spreads on those as well, said Credit Suisse.
The three-month interbank rate here has risen recently to 1.38 per cent, but the 10-year bond had spiked to as high as 3.94 per cent last week before easing to 3.60 per cent yesterday.
Morgan Stanley, too, said that Asian yield curves have steepened recently, most notably in Indonesia, Thailand, Hong Kong and Singapore. 'We believe banks (particularly in Hong Kong, Singapore and Indonesia) should benefit, as their deposits/funding are priced off short rates, while banks with liquid balance sheet can deploy their excess funds into higher-yielding securities, resulting in net interest margin (NIM) expansion,' it said.
Credit Suisse estimates that the Singapore banks' interbank and securities assets make up 28 per cent of their total assets. It did caution, though, that the value of existing portfolio holdings will drop as a result of higher bond yields.
Even more enthusiastic is Deutsche Bank's Michael Chang.
'Singapore banks are in a sweet spot of the cycle. NIM in Singapore seems to be rising. Loan growth is proving incredibly resilient. We may have seen the worst of non-interest income weakness on a quarter-on-quarter basis in Q1 '08. Our analysis in this report indicates that it is too early to be concerned about asset quality,' said Mr Chang.
'Singapore banks are a great defensive investment in these times of uncertainty and we reiterate our overweight rating on the sector.'
So amidst a tough business climate, there's yet a silver lining for local banks.
This article was first published in The Business Times on Jun 18, 2008
