Singapore's three banks could see higher levels of non-performing loans and credit costs in 2024 amid macroeconomic risks, but these systemic stresses will be limited, says Bloomberg Intelligence credit analyst Rena Kwok.
Still, Kwok warns that “pockets of stress” may emerge from the small- and medium-sized enterprises (SME) in some overseas markets, including “lingering” commercial real estate (CRE) risks.
“Yet, high provisions offer a cushion against expected loan impairments,” Kwok writes in a March 4 note.
Defaults contained
Systemic risks in Singapore banks’ overall CRE books are limited despite being exposed to strain beyond its borders, including onshore China, Hong Kong and some developed markets, says Kwok.
In these markets, high rates and growth worries weigh on prices and demand.
See also: Singapore's SMEs may pose some threat to local banks: Bloomberg Intelligence
Most of Singapore banks’ CRE exposure is domestic, where fundamentals are resilient and tied to customers with strong sponsors and credit quality, says Kwok.
Singapore’s banks’ CRE (office) exposure was about 4%-12% of all loans as of 4QFY2023, with roughly half in Singapore.
“The average loan-to-value ratio is below 60% for overall CRE exposures, limiting risks for lenders if property prices dive in some overseas markets, and they aren't likely to take valuation adjustments,” she adds.
According to the three banks, they have steered clear of financing volatile CRE loans, reducing risk.
Still, SME loans backed by Hong Kong property may warrant monitoring, says Kwok.
Systemic stress ‘unlikely’
Singapore banks may be exposed to pockets of stress in riskier loan segments in FY2024, but systemic stresses are unlikely, says Kwok. “Their diversified loan portfolios were built on tight risk control over the years.”
According to Kwok, the lenders’ risk profile should stay solid this year, with a slight rise in gross non-performing loan ratio and credit costs at normalised levels, “since they have set ample provisions since Covid-19”.
DBS Group Holdings’ guidance calls for a 2024 credit cost of 17 to 20 basis points (bps), while United Overseas Bank U11 ’s may be at the lower end of 25-30 bps and Oversea-Chinese Banking Corporation’s (OCBC) at 20-25 bps.
“The lenders’ management overlay may be released if specific provisions are higher than expected,” says Kwok. “Their average provision coverage of 127% and common equity tier-1 (CET-1) of 15% in 4QFY2023 offer big cushions for credit losses.”
For more stories about where money flows, click here for Capital Section
According to Kwok, rates of recovery of non-performing assets (NPA) and new NPA formation are indicators to watch.
Risks may weigh on SMEs
Downside risks in the global economy, China's bumpy recovery and lingering geopolitical tensions could weigh on Singapore SMEs in 2024, says Kwok, even after their payment conduct rebounded sequentially in 4QFY2023.
Across all industries, the percentage of slow payments by local SMEs fell in 4Q2023. Looking ahead to 1HFY2024, recovery in externally-led sectors looks “choppy”, says Kwok, and a more meaningful pickup is only likely in 2HFY2024, premised on a rebound in the global semiconductor industry.
In addition, firms in consumer-led sectors might see continued but moderated growth this year, buoyed by consumption and resilient inbound tourism, says Kwok.
Risks could be partly mitigated by the government's 2024 budgetary support, such as the enhanced enterprise-financing scheme and income-tax rebates, which help SMEs cope with higher operating costs and funding needs.
