Banks’ Profits Lower In Q3?

Source : TODAY, Thursday, October 18, 2007

But higher if compared to same quarter last year: Forecast

BANKS likely had a weaker performance for the three months ended Sept 30, even as loans extended to the housing and construction sectors increased.

Some analysts forecast the banks — DBS Bank Holdings, United Overseas Bank and Oversea-Chinese Banking Corp — to post a net profit of $1.66 billion, which would be a 18.9-per-cent rise from $1.39 billion a year earlier.

Against the second quarter’s average $1.77 billion net profit, the forecast would mark a loss of 6.21 per cent. In the second quarter, earnings rose 35.3 per cent from a year earlier and were 7.42 per cent up from the first quarter.

Monetary Authority of Singapore monthly data show home loans rose 2.6 per cent month on month and 10.7 per cent year on year — the fastest in 29 months— in August, while construction loans increased 0.36 per cent on month and 14.7 per cent on year.

“Strong interest-income growth is offset by a slowdown in fee-income,” said CIMB-GK’s analyst Kenneth Ng.

Such fee income — largely from stockbroking, fund and wealth management — likely was hurt by the United States subprime crisis, which began to unfold from July, analysts said.

Provisions for their investments in collateralised debt obligations (CDO) — or loans to risky borrowers packaged together with other financial instruments and sold to investors — are also possible, although analysts said it is hard to gauge their size.

“We believe market expectations will be focused on the CDO issue and whether there will be provisions taken to earnings,” Mr Tay Chin Seng of Macquarie Research said, although he doesn’t expect that to happen.

CDOs should also come back to haunt the banks if they decide to “kitchen sink” or make mark-to-market provisions of the losses in their balance sheet, said Credit Suisse, adding that could reduce their net profits by 25 per cent on year or as much as 40 per cent on quarter.

Credit Suisse said should the three local banks decide to “kitchen sink” the CDOs, “the market should take it positively”, as “all three of them will still manage to show decent profits”, and “there should be no dent to their Tier 1 capitalisations at all”.