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FIRST Singapore mortage has been the growth driver for the first 9M

Source: Company data (compiled by Goldman Sachs)

Non-performing loans are hurting banks

About those bad loans…


he 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 an alarming regularity for the past 18 months, and that is the non-performing loans made by local banks, particularly to oil & 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 & 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 $3b 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 home mortgages which have shown the biggest growth.

About the only good news is all of the banks have an excess cushion of capital over the regulatory required reserves.

The next threat to banks’ profits in 2017 may well be the strengthening of the US$. Given Singapore banks’ exposure to the region, Maybank Kim Eng conducted a sensitivity analysis to assess the FX impact on Singapore banks’ profits, where regional currencies (ex-HK$)/ 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.

The Chartist: Not-so-great expectations for the manufacturing sector A mere 17% of firms expect business conditions to improve, according to the manufacturing sector’s business expectation survey. Whilst 70% of the firms expect things to stay the same, 13% sees deteriorating business outlook. “The general business outlook index (calculated from the difference between the percentage of ‘optimistic’ firms surveyed and the percentage of ‘pessimistic’ firms surveyed, excluding the surveyed firms that expect things to ‘remain the same’) for October 2016 March 2017 improved to +4% compared with the previous survey’s -1% for July-Dec 2016, but this is well below the post-GFC average of +15% posted during Sep 2009 June 2011,” notes Maybank Kim Eng.

Singapore: Industrial production Index

Sources: Singapore Economic Development Board, Maybank-KE

Singapore IP: Growth in YoY and s.a % MoM

Sources: Singapore Economic Development Board, Maybank-KE


Singapore Business Review (December 2016 - January 2017)  
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