The overall property loan portfolios for all three Singapore banks, DBS Group Holdings, Oversea-Chinese Banking Corporation (OCBC) and United Overseas Bank (UOB) are likely to remain “solid” in 2024, says Bloomberg Intelligence credit analyst Rena Kwok.
“This is given their nature of lending, country of risk for exposures and tight underwriting,” Kwok writes in her March 26 report. “Still, OCBC's small- and medium-sized enterprise (SME) loans backed by Hong Kong property may need watching given its weaker-than-peers credit quality in that segment.”
At present, Kwok sees that real estate risks remain manageable for OCBC and UOB in particular, with the losses in the banks’ loans to the commercial real estate (CRE) sector seeming “contained”. This is despite the near-term elevated interest rates and growth headwinds.
“Based on a foundation internal ratings-based approach (FIRB) in line with Basel rules, the average probability of default for OCBC's and UOB's income-producing real-estate (IPRE) loans has risen only modestly since 2020,” says Kwok.
“This reflects the banks' tight risk controls, where bulk of their CRE loans are in Singapore with resilient fundamentals, and average loan-to-value (LTV) ratio at 50% - 60% for their overall CRE exposures,” she adds. “For the lenders, US CRE loans are mainly secured by Grade A office properties, largely to network customers and strong sponsors.”
Compared with the 4QFY2023 ended Dec 31, 2023, the probability of default of UOB’s IPRE exposure rose to 2.20% whereas the probability of default of OCBC’s IPRE exposures fell to 1.96%, Kwok further notes.
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On the other hand, DBS’s loan exposure to IPRE implies low risks in its overall profile. This is given its resilient fundamentals and tight underwriting despite “pockets of stress” abroad, says Kwok. This is rated internally based on the supervisory slotting approach under Basel rules.
“As of 4QFY2023, 88% of DBS's IPRE loan exposure was rated ‘strong’ and ‘good’, with only $144 million (below 1% default rate) defaulted. DBS's overall CRE loans have average LTV below 60%, limiting risks if property prices dive in some overseas markets and unlikely to take valuations adjustments,” notes Kwok.
“About 80% of DBS's CRE loans are in Singapore and Hong Kong, mostly to high-end obligors. DBS's US CRE exposures were low at $1 billion, mainly to network customers. DBS also cut exposures to onshore China developers to $14 billion in 4QFY2023 to be prudent,” she adds.
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Singapore banks face low liquidity risks in 2024
In a March 21 note, Kwok sees that all three banks face low liquidity risks in 2024 thanks to their ample buffers and deposits.
“Domestic systemically important banks (D-SIBs) in Singapore continue to have robust liquidity buffers to withstand severe market-wide and idiosyncratic liquidity stresses, such as high asset haircuts, material nonbank-deposit withdrawals and constrained access to funding markets,” Kwok writes.
“As of 3QFY2023, the liquidity coverage ratio (LCR) of D-SIBs in Singapore -- including DBS, OCBC and UOB, HSBC, Standard Chartered Bank, Maybank and Citi -- exceeded all-currency minimum regulatory LCR requirements,” she adds.
Singapore’s banking sector also looks set to remain robust in 2024 with all of the major local banks – which have a collective 72% of the sector’s deposits – continue to maintain healthy loan-to-deposit (LDR) ratios in local and foreign currencies.
“The domestic big lenders continued to see strong deposit growth, largely led by individuals who took up higher-yielding fixed-rate deposits,” notes Kwok.
As of January, the sector’s Singapore dollar (SGD), foreign currency and overall LDR ratios stood at 70%, 68% and 69% respectively, which implies that the ample supply of deposits is more than sufficient to fund lending activities.
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In addition, funding costs could fade in the second half of the year as costlier time deposits roll off and onto a slower low-cost outflow of current account savings account (CASA) deposits.
“The big local banks might defend their CASA ratios -- which have fallen to below pre-Covid levels -- to balance their funding costs in 2024, so that they can maintain their interest margins at 2023 levels as interest rates likely peaked last year,” says Kwok.
As of January, Singapore's banking sector CASA ratio fell to about 46%, down 4 percentage points from about 50% a year ago.
Exposure to OCBC’s dollar tier 2s most sold
In her March 20 note on Asean banks, Kwok notes that fund managers have increased their exposure to the dollar Tier 2 debt in the region’s lenders by about US$3 million ($4 million) to $1.69 billion of par value as at the end of February versus January’s figures.
“The rise in fund managers' exposure to Asean banks' dollar Tier 2s was outpaced by additional tier one (AT1)s' US$14 million, perhaps due to demand for high-coupon debt amid market rate-cut expectations,” says the analyst.
Among the banks, Thailand’s Kasikornbank saw the biggest increase in exposure to its dollar Tier 2s, which Kwok attributes to market expectations of rate cuts. At the same time, exposure to OCBC’s dollar Tier 2s fell the most on a m-o-m basis.
“We think this might be due to limited tightening potential, as OCBC's sustained trend in robust asset quality and healthy earnings outlook for 2024 are priced into its bonds,” says Kwok. “OCBC's dollar Tier 2 spreads are currently trading modestly tighter than the past one-year historical average.”
Shares in DBS, OCBC and UOB closed at $36.63, $13.74 and $29.68 respectively on March 27.
