DBS' trading income at the most risk among the big three

Its value at risk is about 3 times that of UOB.

Should macro uncertainties come upon Singapore's big banks, DBS would be the most affected, as its Value at Risk (VAR) could soar, threatening its trading income.

According to a report by MayBank Kim Eng, trading income formed 6-11% of the banks’ total income in 2015, tagging it as the "chief engine" behind revenue growth since 2008.

"Trading books have ballooned, inflating net trading income to an average of 8.4% of total income from 4.6% in 2000," the report said.

DBS' VAR is much higher despite a 97.5% confidence level due to the size of its trading position.

"At a 97.5% confidence level, DBS’ Value at Risk or VAR for its trading book is about 3x UOB’s, even when UOB’s VAR is based on a 99% confidence level. At 99%, DBS’ VAR would be even higher. But to DBS’ credit, its higher VAR did yield higher trading gains, " the report explained.

And with larger trading position, DBS is exposed to more Basel rules which require higher risk weights for trading books.

"If the macro environment turns more volatile, so will returns from treasury desks," it noted.

“More capital will be needed to support its trading desk and returns could shrink," it added.