Singapore banks are unlikely to discard their strategies for the greater China region as the area is “key” for medium-term growth, says Bloomberg Intelligence credit analyst Rena Kwok. The region spans mainland China, Hong Kong, Macau and Taiwan.
Despite the region’s weak risk-return underwriting and uneven economic recovery, risks for Singapore’s banks are limited, notes Kwok in her Oct 2 report. “In percentage terms the greater China region contributes more to bad loans than profits, but systemic risk is low with nonperforming loan (NPL) ratios capped at 2% in 1HFY2024, buffered by high provisions and capital,” she adds.
However, Kwok sees improvements happening in the medium-term. To this end, she expects the banks to focus on targeted growth in the greater China region over the next one to two years by boosting their lending to key growth areas. The banks may also capitalise on the investment and trade trends between the region and Asean, as well as lift their transaction-banking and wealth-management exposure, says Kwok.
“The Asean-6 region's supply-chain diversification and companies' "China Plus One" strategies to expand investment beyond the mainland, as well as efforts to attract sticky deposits and generate fee income, could drive this focus,” she explains.
Oversea-Chinese Banking Corporation (OCBC) has indicated that it aims to grow its revenue by $3 billion by 2025 via its Asean-greater China focus. At the same time, DBS Group Holdings has targeted for growth in the Greater Bay area while United Overseas Bank U11 (UOB) seeks to boost Sino-Asean investment and trade flows.
Meanwhile, the banks are likely to be cautious over onshore lending due to China’s economic difficulties despite the country’s stimulus measures.
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As it is, the banks have already slowed their overall pace in growing their credit exposure in China, instead focusing on growth sectors as they expect to see a slowdown. Of the three banks, OCBC and UOB posted zero to negative growth in greater China loans in 1HFY2024 while DBS, on the other hand, expanded its coverage.
Greater China loans expect to see 3% loss rate thanks to weak property sector
Further to her report, Kwok has estimated a loss rate of 3% on the banks’ greater China loans should the country’s weak property sector continue to weigh on its economic recovery. “This rate matches the lenders' average loss rate in their riskier Asean markets during 2023-2024,” she says.
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“Our point-in-time model ignores lenders' allowances for credit losses and assumes no management actions that mitigate the stress, such as changes to payout policy, equity raising or cost cutting,” she adds.
According to Kwok’s stress-test model, all three banks have capital reserves strong enough to absorb “significantly higher” default rates on their loans, which reduces any need for immediate capital raising.
“Under this extreme hypothetical scenario, post-stressed common equity tier 1 (CET-1) ratios of the banks in 1HFY2024 would be at least 4% above the 9% regulatory hurdle, including a 2.5% capital-conservation buffer,” Kwok writes.
Thanks to the banks’ “robust risk profile”, their dollar Tier 2 bonds (T2s) could be “range-bound” in 2HFY2024 even with the interest rate cuts.
“There seems to be limited room for substantial tightening at current levels, since the lenders' solid credit despite prevailing risks, relatively low bond volatility alongside positive technicals, and manageable refinancing needs in 2024 appear to be reflected by the market,” says Kwok.
“The banks' ample provisions and capital cushions are well able to buffer very modest normalisation in their asset quality this year, despite being exposed to pockets of stress from vulnerable borrowers and commercial real estate in some overseas markets,” she adds.
As of Kwok’s report on Oct 2, Singaporean banks’ dollar T2s, at G-spreads of about 90 basis points to 100 basis points, are trading modestly tighter than their five-year averages of about 120 basis points to 130 basis points. The G-spread refers to the yield spread over an interpolated government bond.
Shares in DBS, OCBC and UOB closed at $38.36, $14.95 and $31.86 respectively on Oct 7.
