Faint light at end of sub-prime tunnel?

But banks now have to deal with slowing economy

A heart-thumping sub-prime ride for local banks may be nearing a halt after two quarters of hefty provisions for risky investments.

But investors looking to banks repeating the double-digit earnings gain of recent years could be disappointed. A slowing economy is likely to put a squeeze on interest margins and earnings growth, suggesting 2008 could turn out to be, at best, unexciting.

“The banks have already provided a significant coverage against its collateralised debt obligation portfolio (CDOs) as far as asset-backed CDOs are concerned … but currently, there is no strong growth catalyst. Business is driven by mostly organic growth and core business,” said Kim Eng analyst Pauline Lee.

For fiscal year 2008, she predicted core bank earnings to grow at an average of 6 per cent to 8 per cent, slower than the 10 per cent in 2007.

Loan growth should remain strong on a robust construction sector and as borrowers start to draw down on loans made during last year’s property boom, said Phillip Securities’ Brandon Ng.

But lower margins caused by falling interest rates could cloud the positive prospects. Inter-bank rates have been easing since late last year, taking the cue from the United States rates.

Stock markets which appeared to defy gravity helped boost non-interest income substantially last year, but the reverberations from the sub-prime crisis shook capital markets and weakened sentiment, suggesting this source of income would be affected in 2008, said Daiwa Institute of Research analyst David Lum.

While “one of the major external risks” may be removed this year, at the same time, “there’s nothing really new to look forward to”, said Mr Lum.

Global banks sent a shiver through the world’s financial system when they disclosed massive losses related to their investments in sub-prime debt. In Singapore, banks created shocks too although their exposures were viewed as more limited.

The shares of the three banks, which have dropped an average of almost 20 per cent from last August to end-January, have since found a footing.

Oversea-Chinese Banking Corporation rose 11 cents, or 1.4 per cent to $7.78 yesterday, while DBS Group Holdings and UOB dropped 18 cents and 42 cents to $17.70 and $18.42 respectively.

Source : Today – 28 Feb 2008

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