Maybank KimEng: What matters most for Singapore banks’ non-performing loans

OCBC, DBS, UOB and Citibank ATMs at Tang Plaza in Singapore; taken September 2018.OCBC, DBS, UOB and Citibank ATMs at Tang Plaza in Singapore; taken September 2018.

Overseas lending, particularly business loans, is a key variable in determining whether Singapore banks’ non-performing loans (NPLs) tick higher, Maybank KimEng said, citing its proprietary analysis using machine-learning algorithms.

“From our analysis, it appears that the pace of non-Singapore dollar loan growth, domestic inflation and the rate of change in special-mention loans have the strongest influence in setting the direction of NPLs,” the brokerage said in a note Wednesday. “In contrast, interest rates, changes to unemployment and GDP growth – variables that traditionally guide NPL forecasts – seem to have a lesser impact.”

The brokerage said it used algorithms similar to ones social-media and video-streaming services use for recommendations to weed through a basket of 17 macro- and micro-economic variables and sector drivers.

With overseas lending has accounting for a large share of the banks’ loan growth for the past three years, NPL risks could be heightened, the brokerage said.

Over the past three years, 63 percent of Singapore banks’ incremental loan growth came from overseas lending, the note said.

Maybank KimEng estimated 2019-20 credit charges would come in at 25-29 basis points, up from 16 basis points in 2018.

In the second quarter, OCBC had the highest non-Singapore dollar loan exposure at 65 percent of its loans, while DBS was at 60 percent and UOB at 53 percent, the note said.

However, the brokerage remained positive on Singapore’s three banks, noting they have some of the highest dividends in the region and strong balance sheets as well as being the cheapest on a price-to-earnings basis in Southeast Asia.

It said UOB was its top pick, citing its conservative balance-sheet management, high provision coverage and a dividend yield of more than 5 percent. It rates UOB at buy with S$29.13 target price.

The brokerage rates both DBS and OCBC at Hold, with target prices of S$28.05 and S$11.05, respectively.

Shares of DBS ended Thursday up 0.36 percent at S$25.34, while OCBC added 0.09 percent to S$11.01 and UOB was flat at S$26.37.

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