China's Debt Misery Finds Singapore

More than 11 percent of the soured assets reported by DBS aren't loans at all but contingent liabilities.
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Chinese banks are justifiably on investors' radar for shuffling some of their more wobbly credit risk into wealth management products. However, when it comes to misery camped off balance sheet, the People's Republic has company elsewhere in Asia: More than 11 percent of the bad assets reported by Singapore's largest lender aren't loans at all but contingent liabilities.

In just one year, the difference between ``nonperforming assets'' and ``nonperforming loans'' at DBS Group Holdings has more than quadrupled to S$355 million ($257 million). Stressed-debt securities account for a very small and stable part of that difference. As much as S$350 million is due to a deterioration in ``contingent liabilities and others.'' 1 The notional value of that business is S$238 billion, the bulk of which is classified as ``undrawn credit commitments."  At rival Oversea-Chinese Banking Corp., which has half as much risk riding on contingent liabilities and commitments, the part that's soured is only S$28 million, unchanged from 12 months earlier.

Loans Aren't Always the Culprit

At Singapore's DBS, the difference between nonperforming assets and nonperforming loans has spiked *

Source: Bloomberg

* Most of the difference is due to NPAs in contingent liabilities and commitments, with a small share for credit deterioration in debt securities.

What's going on?

The dire view is that DBS's disclosure may be shining a light on the rapid worsening of credit stress in Asia's largest economy. After all, Hong Kong and the rest of greater China accounted for more than S$67 billion of DBS's contingent liabilities and commitments as at the end of 2015. And if there's one thing commonsense tells us about about undrawn credit commitments, it's that ``cash-strapped companies draw down on these facilities just as their business is worsening,'' according to former CLSA Asia banking analyst Daniel Tabbush, who recently flagged the risk on research website Smartkarma.

DBS itself, though, has a much more innocuous, and perfectly sensible, explanation. The surge in off-balance sheet credit stress coincides with the surprise Aug. 11 devaluation in China's currency. Companies that had hedged against the risk of yuan appreciation found themselves unable to pony up the cash to cover the mark-to-market losses on their positions. In the bank's reckoning, that accounted for about S$200 million of the S$350 million. And because most of the currency-derivative contracts expire by June, the bad-loan flow will start to ebb, meaning it's a temporary problem. If it really was a case of down-on-luck customers lunging for their last remaining credit line, then DBS has a fix: It can unconditionally cancel almost 83 percent of the commitments.

Going Cheap

DBS has the lowest price-to-book valuation of Singapore's three homegrown banks

Source: Bloomberg

Still, investors are being cautious. Stock in DBS is down almost 10 percent this year, versus a 4 percent decline for OCBC. On analysts' consensus estimates of price-to-book ratios, Singapore's biggest lender now has the lowest valuation of the three homegrown banks at 0.86 times. That pessimism is the worst since the 2008-09 financial crisis.

Rightly or wrongly, the more investors view DBS as a mirror of China's credit woes, the more nettlesome things might get for existing shareholders. Even if off-balance sheet risks start tapering, there's still that remaining 89 percent of bad debt to fret over.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
  1. DBS Group's annual report breaks down contingent liabilities and commitments as guarantees and endorsements on accounts of customers, undrawn credit facilities extended to customers, as well as undisbursed underwriting commitments in securities.  

To contact the author of this story:
Andy Mukherjee in Singapore at

To contact the editor responsible for this story:
Katrina Nicholas at

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