Singapore banks' profits face threats from USD strengthening

Profits could decline by less than 2%.

The only lines on a chart bankers like to see going up are the profit lines. Alas, there is one other line that has been going up with alarming regularity per the last 18 months and that is the Non-performing loans made by local banks, particularly to oil and gas firms. 

UOB leads the pack when it comes to its non-performing loans book, which stood at 1.6% at the end of September, and DBS overtook OCBC to reach 1.32% bad loans whilst OCBC had 1.19%. The numbers for OCBC are indicative of the industry, with roughly 40% of non-performing loans coming from the Oil and Gas industry, 20% from Chinese-owned State-owned industries, and the remaining 40% from a variety of industries.

About the only good news is all of the banks have an excess cushion of capital over the regulatory required reserves, with UOB topping that list with $3bn of spare assets - enough to cushion the blow from its bad loans. The biggest change to the local banking market has been in the source of loan growth over 2016. As the big corporates have faced trouble and some even declined lending, it has been local home mortgages which have shown the biggest growth.

The next threat to banks profits in 2017 may well be the strengthening of the US$. Given Singapore banks’ exposure to the region, Maybank conducted a sensitivity analysis to assess the FX impact on Singapore banks’ profits, where regional currencies (ex-HK$)/US$ will depreciate/appreciate by 5% and 10% against SG$ a 20 to 30bps increase in credit costs on potential higher provisions from US$ exposure.

They found that on aggregate, banks’ profits will decline by less than 2% as the impact of higher credit costs is partly offset by translational gains from US$ strength. “There will be default risks if corporates/customers are not able to repay US$ debt when their domestic currencies depreciate further. In the event of potential higher provisions from US$ exposure, we assess the impact by factoring a 20-30bps increase in credit costs on the banks’ US$ loan book,” the brokerage warns.

This story was first published in the print issue of Singapore Business Review December issue.