Banks face risk of rising credit costs as bad assets mount

Net new NPA formation for all three banks rose in Q2, higher than FY18 quarterly averages.

Banks in Singapore grapple with the risk of rising credit costs after net non-performing asset (NPA) formation rose across the board for the three local lenders in Q2, according to a report from CIMB.

Also read: Bad loans haunt Singapore banks as asset quality risks rise

New NPA formation hit S$286m for DBS in Q2, which is slightly higher compared to the FY18 quarterly average of S$274m. OCBC's quarterly figures hit S$390m compared to the quarterly average of S$304m in 9M18 and UOB recorded S$357m in net new NPAs largely stemming from a real estate exposure in the US, from the FY18 quarterly average of S$283m.

Also read: Singapore banks' bad loan ratio to hit 1.7% by 2020

"Whilst a lower interest rate environment may reduce repayment burdens for corporates and consumers alike, we keep watch on potential asset quality blips given the sustained slower growth environment," analyst Andrea Choong said in a report.

Following the Q2 spike in soured assets, DBS recorded 28bp credit costs in the quarter. "Going forward, the bank holds out for recoveries on its O&G portfolio but we are less optimistic," she said.

Choong also raises credit cost assumptions to 22bp for FY19 for OCBC amidst further provisioning risks. UOB faces a more conservative credit cost estimate of 19bp credit cost in FY19.