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The worst appears to be over for banks in one of the world's major financial hubs

Key Points
  • All three Singapore banks — DBS, OCBC and UOB — topped or generally met expectations in their second-quarter earnings
  • But lingering weakness in the oil and gas sector means asset quality may still deteriorate in the coming quarters, warned DBS CEO Piyush Gupta
  • Singapore banking stocks took a hit on Friday, with DBS leading the sell down
DBS reports 8.5% rise in second quarter net profit

The latest report cards from Singapore three home-grown lenders reinforced expectations that the banking sector in one of the world's primary financial centers has seen its worst.

Loan growth was strong, wealth management income expanded and fewer new bad loans were identified, results showed.

Yet, shares of all three banks were in the red on Friday after Southeast Asia's largest lender, DBS Group Holdings, rounded up the sector's earnings season with a warning that asset quality could deteriorate in the coming quarters due to continued weakness in the oil and gas segment.

Shares of DBS fell 2.31 percent by 3:11 p.m. HK/SIN, while its smaller rivals Oversea-Chinese Banking Corporation (OCBC) and United Overseas Bank (UOB) slipped 0.53 percent and 0.62 percent, respectively.

"Asset quality pressures will continue and the risk of heightened credit costs in the oil and gas support services sector will persist with low oil prices," DBS CEO Piyush Gupta said at media briefing on Friday.

Gupta added that the bank may have to set aside more money to cover for additional bad loans from the segment, and for the drop in collateral values as oil prices remain low.

His sentiment was shared by OCBC CEO Samuel Tsien last week, who said the oil and gas sector was at best "stable."

"Being stable is not adequate for loans to be paid off as scheduled because you need to have continued strong cash flow to pay off those debts. We need the oil and gas sector to improve before the whole situation can be classified as recovering," Tsien said.

The sector has been a drag for the Southeast Asian city-state's banks over the past year. The sharp drop in oil prices forced firms such as Swiber Holdings and Ezra Holdings to seek bankruptcy protection.

Oil and gas the only risk? 

Other than the oil and gas sector, which Gupta called an "identified" risk, the banks didn't face other significant downside risks, the DBS CEO said.

All three banks expected their loan books to continue expanding into the second half of 2017, partly due to an improving domestic property market, which has increased demand for mortgages. At the same time, net interest margin – a measure of lending profitability – is expected to trend higher as global interest rates rise.

Singapore's financial district

Wealth management has also emerged a bright spot for the banks, particularly for OCBC, where the segment helped drive its 22 percent increase in second-quarter net profit. Tsien said the growth was both a result of the acquisition of Barclays' wealth units in Singapore and Hong Kong last year, as well as organic expansion of its existing business.

"OCBC's key differentiating factor lies in its insurance business, which gives it a more holistic wealth management platform, which we believe the market may still be under-appreciating. Solid second-quarter earnings were testimony of its non-interest income franchise," DBS Equity Research's Sue Lin Lim wrote in a note.

Wealth management was also expected to boost DBS' earnings in the coming quarters as it integrates the retail and wealth operations that it purchased from ANZ last year. Meanwhile, UOB said it is growing its high net worth business segment organically.

As prospects for the banks look up, their shares offer investors the temptation to "take profits," KGI Securities' trading strategist Nicholas Teo wrote in a note. Before Friday's sell down, the three banks led a rally in the Straits Times Index, where gains far outpaced many of its regional peers.

"For retail investors and swing traders, this is an easy course of action. For institutional money, however, this could be a tougher call especially when there is a lack of viable replacement (for their holdings in the banks)," Teo wrote.