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WHERE should Singapore banks go from here?
Shareholders might well be asking themselves that question.
Few bank watchers are expecting any surprises, good or bad, to emerge from the banks' second-quarter results next month, so the banks will have to do very well - or very badly - to make investors sit up.
The outlook for the banks has undoubtedly improved since the first quarter - if only because the worst seems to be over for the broader economy.
But loans growth, if any, has been unremarkable, judging from the aggregate bank lending figures to end-May published by the Monetary Authority of Singapore. Lending to businesses has been falling steadily since end-October last year due to a combination of tighter lending standards and lower demand as firms shelved spending plans. That has been balanced by growth in consumer loans - mainly home loans - but there was almost no growth in overall bank lending for the first two months of the second quarter. The banks' net interest margins, which measure how much profit the banks make on loans after deducting funding costs, are unlikely to offer much cause for excitement either. Sibor, the rate that banks here charge one another for Singapore-dollar loans and which, in turn, determines the rates that they charge on a large portion of their small-business loans and consumer home loans, has remained well below one per cent since January. That limits how much banks can charge for loans, and the profit that they make from lending.
What of the argument that with some foreign banks in trouble, the local banks - with their high capital ratios and a broad base of retail deposits as a cheap source of funds - would be able to charge more than before to lend?
As long as demand for borrowing remains subdued, competition among the banks - foreign and local - to extend loans will keep lending margins thin, says Brandon Ng, deputy head of research at Phillip Securities.
Non-interest income from proprietary trading and securities broking may fare better, if only because of the sharp rally in equity prices and trading volumes in the second quarter. But these tend to be unreliable as sustainable sources of earnings.
Intriguingly, perhaps the most viable source of growth in the months ahead may lie overseas. Malaysia has recently announced measures to liberalise its financial services sector. That has opened up some new opportunities for the Singapore banks.
Vince Cook, chief executive of DBS Group subsidiary Islamic Bank of Asia, said in May that the bank is keen to expand its business there. OCBC Bank CEO David Conner has said that he, too, would like more branches there.
That is probably good for the next few years. Markets such as Malaysia and Indonesia offer better profit margins compared to highly competitive markets such as Singapore and Hong Kong. Newly emerging markets such as China and India, despite the regulatory hurdles, offer even greater promise in the longer term.
Recent developments have reminded investors that Singapore banks have no unique claim to any of these markets, not even in South-east Asia. Banks elsewhere that have been quiet until now are starting to sniff around the region. This week, Taiwan's Chinatrust Commercial Bank made a big fanfare at the opening of its Singapore branch office, complete with a lion dance and a ribbon-cutting ceremony.
The pomp may be just that, but there is no mistaking the bank's intentions - to use its strong capital position, backed by its own broad base of retail deposits in Taiwan, to offer trade financing, syndicated loans and other services to firms in South-east Asia, India and the Middle East.
James Chen, president of the bank's parent company, said that an important reason it was keen to expand outside Taiwan - another highly competitive banking market - was that margins there were wafer-thin.
For now, Singapore banks should find it easy not to disappoint investors. But if the economic recovery is genuine, they will soon need to show how they plan to put the much-touted strength of their balance sheets to work, while fending off competition from other banks with similar ideas.
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