Singapore banks need to brace themselves for subdued credit growth next year, say analysts.
Efforts to boost earnings by expanding in emerging markets -- as in the case of DBS' bid for Indonesia's Bank Danamon -- have been inconclusive. And with the macroeconomic outlook still grim, analysts expect earnings growth to fall in 2013.
It was a tale of two halves for Singapore banks this year. Lending was buoyant in the first half, before moderating towards the end of the year as business and consumer sentiment was hit by weaker macroeconomic growth.
Kenneth Ng, head of Singapore Research, CIMB, said: "Today, you're seeing a lot of corporates with a lot of cash on their balance sheets, but nobody wants to expand capacity rapidly because there's just no confidence or end-consumer demand.
"So basically, that's the headwind against higher credit growth. In such an environment, the banks would not really have strong net interest income growth and they're all dependent on fees to drive the earnings."
To date, all three Singapore banks reported better profit figures compared to the previous year.
Nine-month net profit for DBS, the largest local bank by assets, grew 13 per cent to S$2.6 billion.
OCBC reported a whopping S$3.3 billion in net profit -- thanks to gains from divesting its stakes in Fraser & Neave and Asia Pacific Breweries. After stripping away these gains, core net profit was S$2.2 billion, up 28 per cent from the previous year.
The smallest local bank UOB's net profit for the first nine months of this year also rose 19 per cent to S$2.1 billion.
Still, analysts expect slower earnings growth next year.
Jonathan Koh, associate director of UOB Kay Hian Research, said: "On a full-year basis, we'd expect the local banks to achieve earnings growth at a mid-single-digit level, with most of the banks providing ROE (return on equity) of above 11 per cent.
"I think DBS will definitely be clocking in net profit of above S$3 billion. For the two other local banks, it'll be more than S$2 billion and moving very close to S$3 billion, and I think that will be quite a remarkable achievement."
The operating environment for the banks got tougher after they were hit by curbs on housing loans -- as the Singapore government seeks to prevent a property bubble driven by a low interest rate environment.
Mr Koh said: "In Singapore, we have a case where our interest rate is near zero. Our interest rate is very highly correlated with the US interest rate and because of that, we have a property market that's quite bullish."
The low interest rate environment also lowered the cost of issuing bonds for corporates.
Although that has helped fuel a record year for Singapore's corporate bond market, with volumes at around S$33 billion, analysts say there is a limit to how much non-interest income, which includes fee-related activities like investment banking can help compensate for slower loan growth and net interest income growth.
Ritesh Maheshwari, MD of Asia-Pacific Financial Services Ratings, Standard & Poor's, said: "It is definitely sobering times for Singapore banks. This is where the strength of the domestic franchise, funding platform and cost effectiveness will end up being the differentiator."
Even so, these banks can take comfort in their healthy asset quality. This means they are likely to keep their high grade credit ratings and benefit from favourable funding costs.