Banks Likely To Post Decent Earnings Growth For Q3

Source : The Business Times, October 17, 2007

But much hinges on whether they make large provisions for exposure to CDOs, warn analysts

AS the third-quarter results season kicks off, the three Singapore-listed banking groups - DBS, UOB and OCBC - will be closely watched for the impact of recent financial market turmoil on their bottom lines.

Positive outlook: Banks here have enjoyed a good run so far this year, buoyed by strong economic growth, high employment and busy stock and property markets -- FILE PHOTO

Banking analysts BT spoke to said they generally expect 'decent' earnings growth for Q3 compared with the same period last year.

But they warned that the rosy forecasts could be thrown off if the banks make large provisions against earnings for any losses from their exposure to collateralised debt obligations or CDOs.

Some analysts believe the market value of these debt securities may have fallen by half since the start of the credit crisis in August, which caused the market for such instruments to dry up.

Some international banks have already reported a steep fall in Q3 earnings after accounting for a sharp drop in the value of the debt securities they hold.

Earlier this week in the US, Citigroup announced a 57 per cent drop in Q3 net profit to US$2.38 billion after taking a hit of almost US$3 billion from writing down the value of various loans and securities, including those backed by sub-prime mortgages.

Banks here have so far enjoyed a good run this year, buoyed by strong economic growth, high employment and busy stock and property markets. These factors are likely to support continued strong earnings for the banks, said analysts here.

'The only uncertainty is the amount of provisions they will make for their sub-prime exposure, if any,' said David Lum at the Daiwa Institute of Research.

Pauline Lee at Kim Eng Securities said she expects 'quite decent growth on a year-on-year basis, but it may be slightly weaker than the second quarter'. Her projections for net profit growth for each of the banks range from 13-20 per cent compared with the same period last year.

Stockmarket and investment-banking activities were still strong in Q3, she said. 'Fee income should still see decent growth.'

Leng Seng Choon at UOB-Kay Hian agreed. 'Broking income should still be good.'

Much hinges on how the banks choose to account for any fall in value of any debt securities they are exposed to, the analysts said.

If the banks believe a portion of their CDO holdings can no longer be recovered, 'they may write it off to the P&L (profit and loss statement)', which could put a dent in their earnings, said Ms Lee.

In a research note published yesterday, Credit Suisse analyst Sanjay Jain estimates that the banks' net profits could fall as much as 25 per cent compared with Q3 last year and 40 per cent from Q2 this year, assuming they mark down the value of their CDO exposure and take the hit in their P&L statements.

But he added that if the banks do take such charges against their earnings, 'the market should take it positively, as seen in US banks' and that 'all three of them will still manage to show decent profits'.

Not all analysts expect to see an impact on the banks' earnings from their CDO exposure.

In a report published last month, Tay Chin Seng of Macquarie Research wrote: 'At this time we do not anticipate any provisions from the mark-to-market losses on the banks' CDOs to be put through their profit and loss statements.'

He expects the banks' combined Q3 net profit to be $1.73 billion - a projected increase of 23.8 per cent from the same period last year and 2.9 per cent from Q2 this year.