Record-low Sibor to hit local bank earnings

Analysts expect Singapore’s three big banks to report weaker earnings for the third quarter of this year, due to an all-time low Singapore Interbank Offered Rate or Sibor.

As of last Friday, Sibor stands at 0.44 per cent or 44 basis points – it’s lowest in 23 years. As interest from interbank loans is pegged to Sibor, analysts said banks may see lower net interest incomes in their latest financial results.

Analysts said more hot money is expected to flow into this region as a result of quantitative easing in developed markets.

“It seems increasingly likely that the Sibor could stay at this very low level for a very protracted period of time,” said RBS banking analyst Trevor Kalcic.

He foresees Sibor to increase marginally to 60 basis points or 0.6 per cent for this year and to 80 points or 0.8 per cent for next year.

RBS maintained its “sell” call on DBS Bank, which will release its results on Nov 4, citing low rate headwinds as a strain to earnings into next year.

To limit the impact of low interest rates, Mr Kalcic expects DBS to post strong loan growth for its third quarter results.

According to RBS forecasts for third quarter results, UOB and DBS may report lower interest incomes, with DBS posting the biggest decrease at 10.5 per cent on-year.

But Mr Alfred Chan, banking analyst at Fitch Ratings, said long-term prospects for banks remain bright.

“Banks are generally reporting stronger profitability in 2010 than 2009. They have been making provisions in 2009 for stress environments,” he said.

“They also have very liquid balance sheet. They are able to manage the low- interest situation as they already have a strong deposits base,” said Mr Chan.

With Singapore’s growth forecast of 5 per cent next year, he expects robust economic activity to provide support for the banks’ diversified revenue streams. One of these streams is loan growth. Mr Kalcic said loan growth is picking up and should reach 10 per cent for this year and the next.

“After lagging for some time, business lending is starting to accelerate,” he said, adding that it will impact earnings more positively compared to consumer lending.

“The reason is that consumer lending is primarily driven by mortgage lending, which is a relatively low-margin business.” said Mr Kalcic.

Source : Today – 25 Oct 2010

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