Banks embark on risky overseas pivot

Loan exposure to China has grown although loan quality has yet to be tested.

The shift by banks in Singapore away from their home turfs and into more volatile emerging markets is expected to deal a blow to their risk profiles and pose additional challenges to asset quality and operational complexity although most of the risks has been contained so far, according to Fitch Ratings.

Also read: Singapore banks' loan growth to grind to a halt at 0.5% by end-2019

In May, Fitch revised the Outlook on the 'aa-' operating environment for DBS, OCBC and UOB to Negative from Stable on 7 May 2019 as it regards the overseas operating environments as 'mostly more risky than Singapore'.

Banks are increasingly relying on their regional operations to grow their loan portfolios amidst subdued growth in Singapore, CGS-CIMB said in an earlier report. In July, loan growth remained disappointing at 0.2% MoM or 4.4% YoY in July with regional gains offsetting the 0.9% MoM contraction in domestic credit.

OCBC saw its loan exposure to Hong Kong swell from 2% in 2010 to 13% in June 2019 in the same way that its loans to Mainland China, Macao and Taiwan increased from 8% to 11% over the same period. Loans by DBS to Mainland China, Macao and Taiwan also rose from 9% to 15%. Similarly, UOB saw its Hong Kong loan exposure rise from 2% to 12% over the near nine-year period and its Mainland China, Macao and Taiwan loans rise from 2% to 4%.

Also read: Banks stomach larger asset quality risk in overseas pivot

"The banks' exposure to greater China has increased in recent years, with loan quality yet to be tested - given the largely benign environment," observed Fitch Ratings. However, much of the banking sector's loan exposure has been to top-tier and systemically important state-owned enterprises and a significant part of their exposure is to short-term trade loans which generally bear low risk.

Outside of Asia, the banking sector's exposure has increased significantly over the past decade, particularly to Australia, UK and US with loans mostly to investment funds and multinationals.

"We believe that the credit strength of these loans is likely to become more apparent in the event of economic stress, with the credit risk further mitigated by hard asset collateralisation," added Fitch Ratings.