Finance

Andy Mukherjee is a Bloomberg Gadfly columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.

Are Singapore's banks turning boring again? Probably, yes. Are they making the slide into tedium worthwhile for shareholders? Maybe not.

What Financial Crisis?
Singapore lenders' average return on equity has barely budged from eight years ago
Source: Bloomberg
*Market capitalization weighted averages

Before the onset of the subprime crisis in the U.S., the three homegrown Singapore lenders -- DBS, Oversea-Chinese Banking Corp. and United Overseas Bank -- used to earn a humdrum 13 percent return on equity, compared with of 25 percent for large banks in Hong Kong, 20 percent in Australia and 19 percent in the U.K. Then the tables turned. While global banks had to load up on capital and drive down shareholder returns to bolster their balance sheets, strongly capitalized lenders in the Asian city-state found a great opportunity to finance China's credit bubble, as well as a red-hot property market at home.

Returns on equity of the trio last year were almost double HSBC's, and approaching six times the level for U.K. banks as a group. 

The exciting times couldn't have lasted forever, and a strong indication that they are finally over came Friday morning when OCBC disclosed that its core ROE slid from 13.2 percent at the end of first quarter of 2015 to just 10.1 percent. A day earlier, UOB, the smallest of the three, announced a return on equity of 10.2 percent. DBS, the largest, will report its earnings next week, and at least one analyst is expecting a measly 10.07 percent ROE.

Tryst With New Normal
Days of double-digit returns on equity may be about to end for Singapore lenders
Source: Bloomberg
*Average of DBS, OCBC and UOB; data for 2016 are consensus analyst estimates.

Even that 10 percent floor might not hold for long. Trade financing is in the doldrums. Singapore's rig builders are starved of new orders, while the city's property market is slip-sliding away because of a glut of homes and offices in a weak economy. Meanwhile, credit costs on loans to Chinese borrowers can only increase. And amid all the chatter about how China's ICBC managed to avoid a drop in quarterly profit only by thinning down provisions for bad debt, don't forget the Singaporeans: OCBC says its total allowances are 113 percent of nonperforming loans, down from 166 percent in March last year.

The city-state's banks boast strong capital positions, meaning they can ride out bad times without dizzying investors with anxiety.  But a single-digit ROE is too great a sacrifice to achieve a fortress-like balance sheet. The onus is on the lenders to show that they're prepared to take a hatchet to operating expenses -- especially wage bills -- to juice up returns. Otherwise, for shareholders, the price of boredom may not be worth paying.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Andy Mukherjee in Singapore at amukherjee@bloomberg.net

To contact the editor responsible for this story:
Paul Sillitoe at psillitoe@bloomberg.net