Andy Mukherjee is a Bloomberg Gadfly columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.

In fretting over DBS Group's nonperforming loans, investors may be ignoring a slipperier banana peel: contingent liabilities.

When Gadfly flagged the risk in May, the difference between "nonperforming assets" and "nonperforming loans" for Singapore's largest bank had more than quadrupled to S$355 million ($257 million) in one year. That was worrying enough. But with Monday's earnings report showing a further 67 percent jump in the NPA-NPL gap between March and June, the situation is now worse than it was during the 2009 crisis:

Mind the Gap
DBS Group's contingent liabilities are souring faster than loans
Source: DBS financial statements; Bloomberg

At the time, the word from DBS was that the bulk of the off-balance-sheet credit stress had emanated from the shock Aug. 11 devaluation of the yuan. The bank's clients, expecting the Chinese currency to keep rising forever, were suddenly left holding money-losing bets. Some were unable to bring in more cash to cover their mark-to-market losses. So DBS had to bump up its own estimate of nonperforming assets.

The bank's argument back then was that the strain would ease as yuan derivatives started to expire around June. If that were true, investors might now be seeing the worst of the damage. Yet it's hard to be very confident of that forecast, given that the bank's off-balance-sheet derivative book has shrunk by a mere 1.5 percent in the past year. 

Big Risks Stored Away
Off-balance-sheet items, compared with shareholder funds, highest for DBS among Singapore banks*
Source: Financial statements; Bloomberg
*Contingent liabilities, credit commitments and financial derivatives divided by total common equity.

Then there are undrawn credit lines, which might get triggered just as borrowers turn desperate. In March, DBS could unconditionally cancel 83 percent of those commitments. That has now slipped to a little above 81 percent, even as the commitments themselves have inched up to S$221.6 billion.

DBS has hogged the limelight the past couple of weeks for the unraveling of its outsize loans to Singaporean offshore marine-services firms, including a S$700 million exposure to the Swiber group, a provider of construction services for oil and gas projects that nearly drowned in debt and is now seeking a court-supervised effort to stay afloat.

But even as DBS on Monday reported a 6 percent decline in net income, more Swiber-type debacles aren't the only risk to the lender's earnings. Losses from off-balance-sheet exposure may become "another reason that the bank must increase its provision costs more during the year," Daniel Tabbush wrote on research website Smartkarma. For investors, "there can be meaningful risk here," warns the former CLSA banking analyst.

Those who expressed relief by bidding DBS shares higher after the results would do well to watch their step.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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

To contact the editor responsible for this story:
Paul Sillitoe at