Singapore Banks

Maybank Kim Eng Research, March 14

LENDING by Singapore banking system to China has grown at an impressive 68.7 per cent CAGR since 2009, according to data from the Monetary Authority of Singapore.

As of end-2013, trade loans accounted for 65 per cent of total loans in China, versus just 18 per cent prior to the 2008-2009 Global Financial Crisis (GFC).

China's clampdown on credit and the retreat of the European banks from Asia in the wake of the eurozone crisis have spawned finance activities offshore. As a result, China has become a net borrower from Singapore.

But with the country embarking on economic restructuring amid unabated fears about its shadow banking system, there are concerns that Singapore banks' increased exposure to China could present risks.

DBS has the largest exposure to Greater China among the three Singapore banks. The region accounted for 35 per cent of its total loans in 2013 (33 per cent in 2008), followed by OCBC (16 per cent versus 8 per cent in 2008) and UOB (7 per cent versus 5 per cent in 2008).

But OCBC was the most aggressive in growing its loans in Greater China, posting a strong CAGR of 31.6 per cent since 2008, compared with UOB's 20.5 per cent and DBS' 16.4 per cent.

In our view, the robust lending is unlikely to pose pitfalls for all three banks. First, the banks have limited lending to clients in China to meet their domestic needs. Second, loan growth was primarily driven by safe short-term trade loans (65 per cent of total loans to China at end-2013 from 18 per cent pre-GFC) and/or working capital with a focus on Chinese corporates with whom the banks want to build a long-term relationship.

In short, we believe the concerns are overhyped. For exposure, DBS is our top sector pick as it is best-positioned to take advantage of a rising interest rate environment.

Sector - OVERWEIGHT