Overseas exposure to be key driver of bad loans for Singapore banks

Fri, Sep 13, 2019 – 5:50 AM


SINGAPORE banks' overseas exposure will be a key source of their non-performing loan (NPL) growth from the "inflexion point" of Q2 this year, based on an analyst's study on NPL factors using machine-learning algorithms.

"What matters most for NPLs is not what you think," said Maybank Kim Eng research analyst Thilan Wickramasinghe in a Sept 11 client note.

Using machine learning algorithms set loose to examine correlations across factors, he sought to identify the key variables that affect Singapore banks' NPLs, out of a basket of 17 variables that included macroeconomic factors and sector drivers.

The results show that non-SGD loan growth – particularly business loans – is a key indicator of NPL growth. The Consumer Price Index or CPI, as well as changes in property prices, also show correlations.

On the flip side, traditional indicators such as gross domestic product (GDP), unemployment, and changes in Sibor have weaker correlations.

"From our analysis, it appears that the pace of non-SGD loan growth, domestic inflation, and the rate of change in special-mention loans have the strongest influence in setting the direction of NPLs," he said.

"In contrast, interest rates, changes to unemployment and GDP growth – variables that traditionally guide NPL forecasts – seem to have a lesser impact."

Mr Wickramasinghe noted that in the past three years, an average 63 per cent of incremental loan growth for Singapore banks was generated by overseas lending. Both UOB and OCBC were fairly aggressive in lending outside Singapore he said.

"However, during this period their NPL growth was led by domestic lending, not overseas. We believe this is an exception from lagged effect of higher prior domestic loan growth as well as the O&M (offshore & marine) crisis of 2017-18, when banks were forced to make significant write-offs," Mr Wickramasinghe said.

In Q2 this year, the NPL ratio for all three banks – DBS, OCBC and UOB – stood at 1.5 per cent.

Mr Wickramasinghe now sees Q2 2019 as an "inflexion poRead More – Source