In the know: Dissecting DBS' $50b Greater China trade book

How does DBS manage the risks?

Despite posting a record-breaking profit in Q2, concerns remain over DBS’ significant exposure to Greater China. The bank has S$50bn loan exposure to China (19% of group loans), of which S$36bn is trade-related.

A report by CIMB showed how DBS was able to quantify its China exposure to granular details
and explained how it manages the risks. The report showed that $14b of the China non-trade related loan book is to large corporates, of which there are loans of S$2bn to China state-owned enterprise (SOE) developers and Singapore developers in China.

Majority (S$33bn) of the trade book is exporting bills under letters of credit (EBLCs). These fund imports into China where the counterparty risk stems from the importer’s banks. In this space, the exposure of DBS is with the Big 4 China banks and the policy banks.

According to CIMB, “In our opinion, this is the space that is also harder to commit fraud, because it is easier to track the physical goods being imported into China. Management does not believe that the case of ICBC trying to default on a counterparty foreign bank in its letter of
credit, will lead to the revocation of age-old rules on trade finance.”

DBS stressed that there are longstanding rules to trade finance that will not be overturned and traditional trade finance default rates stand at 2bp. The bank also noted that the case with the Qingdao port is very specific to one customer and does not have far-reaching consequences.

Here’s more from CIMB:
Moving to the fraud-susceptible part of the business, import financing. This is the business of financing exports out of China where the client is in China and approaches DBS for import financing.

On certain occasions, if a Chinese bank approaches DBS, then the Chinese onshore bank would be deemed a client instead. This exposure is quantified at S$2bn.

The type of trade business that is at risk of commodity financing fraud is called collateral management agreement. In this line of business, the risk lies with the pledged collaterals, i.e. a batch of copper moving through the ocean or sitting in the warehouse.

DBS has none of these businesses, which explains why it does not have exposure to Qingdao.
Lastly, DBS has a total trade book of S$61bn, but we are not too concerned with the remaining S$25bn of the trade book that is not China-related.

On a more macro level, DBS CEO Piyush Gupta believes that the current concerns over a China slowdown are overdone. DBS has also downplayed the impact of China’s potential asset quality impact from the property sector and its related sectors, LGFVs and shadow banking.

Given the size of its reserves, China has the capacity to re-capitalise the system if it needs to, i.e. if things turn really bad. Assuming that the official system NPL is too low at 0.5% and China system NPL needs to go up to 2%, this translate into US$200bn of credit losses.

Add in a 10% default rate for LGFVs and shadow banking, this would at most bring credit losses up to a few hundred billion dollars. China has US$4tr in reserves and will have the capacity to deal with any upcoming crisis. Hence, DBS is bullish on China and believes that it still has to be committed to expanding in China.