SINGAPORE (Sept 12): Singapore banks seem to be a cut above the rest in Asean, offering some of the highest dividends and ranking among the cheapest in price-to-equity (PE) terms, bolstered by strong balance sheets.
But a recent report from Maybank Kim Eng which uses artificial intelligence, has revealed that the biggest threat to the appeal of Singapore banks appears to overseas lending – which accounts for 63% of incremental loan growth for Singapore banks. In turn, this affects the banks’ non-performing loan (NPL) figures.
“The banks' loan growth has been fueled by non-SGD lending in the last three years, which is among the major factors in determining NPL rates,” says Maybank Kim Eng.
NPL forecasts are traditionally guided by factors such as interest rates, changes to unemployment and GDP growth. But Maybank analyst Thilan Wickramasinghe notes that recent analysis, which uses supervised machine learning algorithms to gauge the different metrics affecting the NPLs of local banks, has shown that these variables “seem to have a lesser impact”.
“From our analysis, it appears that the pace of non-SGD loan growth, domestic inflation and the rate of change in special-mention loans have the strongest influence in setting the direction of NPLs,” Wickramasinghe shares in a Wednesday report.
Overseas lending brings with it a slew of risks – in particular a spike in asset-quality risks as a result of increased non-SGD exposure. This necessitates a close watch on credit-charge risks by Singapore banks.
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Maybank’s forecasts of 25bps/29bps credit charges for 2019-20E are significantly higher than 16bps back in 2018, indicating that risks are likely to be on the upside.
Among the local banks, UOB and OCBC were noted to be fairly aggressive in lending outside Singapore.
In Maybank’s view, 2Q19 was a likely “inflection point” giving the research house good reason to believe that Singapore banks’ overseas exposure will be the main source of NPL growth in the near term.
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For 2Q19, OCBC was noted to have the highest non-SGD loan exposure at 65% of its total loan book, while DBS had 60%. UOB had the lowest at 53%.
Expectedly, UOB remains the top pick for Maybank, as its high provision coverage and historically conservative balance-sheet management provide significant buffers against volatility. Another plus-point is its dividend yield – which hovers above 5%.
Nevertheless, Maybank Kim Eng remains bullish on Singapore banks, and is keeping its “positive” outlook on the sector despite the looming risk of increased overseas lending.
“With overseas lending accounting for a large share of loan growth in the past three years, we think NPL risks may heighten as the cycle turns. That said, strong capital and good dividend visibility should provide buffers,” says Wickramasinghe.
As at 4.34pm, shares in UOB, OCBC and DBS are trading at $26.44, $11.02 and $25.37 respectively.
