SINGAPORE -- Southeast Asia's largest lenders are increasingly concerned about the ongoing U.S.-China trade war and its potential to spill over to the region's financial markets.
"We are quite concerned about this [trade war]," said Samuel Tsien, chief executive of Singapore-based Oversea-Chinese Banking Corp., at a results briefing for the April-June quarter on Monday.
The region's second largest bank logged a 16% net profit increase for the quarter from a year ago, backed by steady growth across most industries. But the trade issue has started to loom over its outlook as the U.S. and China have moved to impose import tariffs on each other's goods.
"The concern is not only on trade itself, it is actually on a shrinkage of the economies that we would see in the event that [the trade war] is carried out to the extent of [current] rhetoric," he said, adding that further tariff measures could make "a significant impact on the world economy."
"In the second quarter [of 2018], trade actually increased," Tsien said, perhaps because there were accelerated trade flows in anticipation of the implementation of sanctions. In the third quarter, however, "I would expect there will be a change in the direction of trade flow." The trade war will impact capital flows, investment flows in addition to trade flows, he said.
Tsien added that Malaysia, Vietnam and Thailand would be among those countries most impacted by the trade wars as they have active roles in the global supply chain.
Southeast Asia's largest lender DBS Group Holdings also expressed concerns, even though it logged a 20% year-on-year rise in quarterly net profit.
Chief Executive Piyush Gupta said in a briefing on Aug 2 that the trade war was less a matter of what happened to trade flows than "a market psychology issue". "For us," he continued, "it's not the fundamental core business that gets impacted but it is the treasury market business that will see some impact."
The trade war between the U.S. and China was "a key emerging risk factor" for Singapore banks, said Simon Chen, senior analyst at Moody's Investors Service. "We expect the trade dispute to escalate and to be prolonged. When that happens, there will be a negative impact on the global supply chain, global growth conditions and there might also be a spillover to the stability of the financial market."
According to Chen, there may also be an adjustment of asset prices and confidence in certain markets, potentially leading to some currency adjustments. "One worry is that there could be further capital outflows from some of the emerging markets in Asia that would translate into volatility in the financial market in this region."
As far as results for the April-June quarter are concerned, the Singaporean banks showed "strong profitability due to improved net interest margins," said Chen.
United Overseas Bank, the city state's third largest lender, also marked a 28% net profit rise from a year ago.
Chen pointed out that the higher interest rates in Singaporean banks' key markets, namely Singapore and Hong Kong, which happened in tandem with a rise in U.S. rates, was one of the factors behind their strong performance. "The banks have been able to reprice their loans at higher rates at a much faster pace than their funding, which drove the improvement in interest margins."