Bad Greater China loans feared to dent DBS’ profitability in 2016: Moody’s

O&G will provide another drag.

Singapore’s largest bank reported impressively robust results in 2015, but Moody's Investors Service warned that the group’s profitability will come under increasing pressure from bad loans in Greater China and the oil & gas sector.

Deteriorating asset quality stemming from the group's oil and gas and Greater China exposures point to rising credit costs and weaker profitability in the coming quarters, Moody’s report said.

"Like its peer banks, DBS also saw a broad-based deterioration in asset quality through 2015, a trend we expect to continue because of slowing economic and trade growth in Asia, and increasing stress for oil and gas borrowers in Singapore," says Simon Chen, a Moody's Vice President and Senior Analyst.

While DBS’ overall non-performing loans (NPL) ratio was stable year-on-year, the quality of its Greater China loan portfolio showed a marked deterioration in 2015, which drove up the NPL ratio of its foreign loan portfolio (Exhibit 2). Its Hong Kong loan portfolio (18% of total group loans) saw an increase in NPLs to 0.8% from 0.5% a year ago, while the NPL ratio for the rest of the loans in its Greater China portfolio — consisting of lending to China and Taiwan and making up 16% of total group loans — rose to 0.9% from 0.7% a year ago.

Compared to its peers OCBC and UOB, DBS reported the largest exposure to oil and gas borrowers as at the end of 2015, including to services companies, which were the most affected by the collapse in oil prices. DBS' exposure to oil and gas services firms amounted to around 24% of its common equity Tier 1 capital.

However, DBS said that the quality of its oil and gas portfolio remains healthy, with only 1.3% of loans to oil support services borrowers classified as non-performing.

Despite assurance from DBS, Moody's expects that the group will increase its provisions in coming quarters, and in particular against its oil and gas exposures, which in turn will pressure profitability.

Although the higher provisions will negatively affect DBS' profitability, Moody's does not expect a material impact on the group's robust capital buffers. Moody's expects DBS will continue to report robust pre-provision income that can cover the expected rise in credit costs.