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Singapore Banks Series (UOB, OCBC, DBS) – Understanding what loan books are and why they matter

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This is the third part of our Singapore Banking series.

As discussed in the last post, the main driver of earnings for banks are interest income (or specifically net interest income).

Net interest income = Interest income – interest expense

And profitability of these loans are dictated by net interest margins.

If you were to add up all their loans, you get their “loan book” which is simply the collective value of all their loans added up together.


Thinking more about loan books

Going back to our example of a money lender – you could choose to lend your money to different groups of people.

Each group of person would have a different characteristic which would impact their ability to repay the interest and principal back.

Ideally you want a reasonably diversified loan book so that you are not overly exposed to one type of customer.

If you lend to only one type of business – let’s say bubble tea store owners and the business is in decline, you may find that all your loans sour at the same time because you are really only exposed to one sector.

Another principle is that the riskier the customer – the higher the likelihood of default. In order to compensate you for that risk, you would typically demand a much higher interest in exchange for taking on that risk.


Breaking down the loan books of banks

One thing that strikes out is that Singapore bank is that a huge component of all three banks’ loan books are focused on housing mortgage and loans to construction and property companies.

OCBC Annual Report 2017

OCBC Annual Report 2017

Applying What We’ve Learned

Looking at the results of the banks in the last year, a large driver of the loan book has really been driven by an increase in the growth of loans to these corresponding sectors.

At the same time, when the property market cools down, you can see that expectations for loan growth also tempers.

The comments from DBS CEO Piyush Gupta  are quite instructive in this regards:

DBS Group Holdings, the nation’s largest mortgage provider, has dialled back its property loans growth forecast by S$1 billion, given that last month’s cooling measures are expected to hit sentiment.

“We originally anticipated putting on about S$4 billion consumer mortgages. With the slowdown and given what happened in the last set of tightening measures, I anticipate we’ll probably give up about half a billion dollars in new-loan booking in the second half of this year, so we’d probably come in at S$3.5 billion instead of four,” he said.

He also expects activity to slow down on the developers’ side, so overall, the bank is weighing a potential shortfall of S$1 billion in loanson account of the property measures.


Ending Thoughts

Understanding a bank’s loan book is important to assess both its future financial performance as well as its financial strength. Housing and property development has really driven the growth of the loan book till date but that has started to peter off.

In the case of the oil & gas (O & G) slowdown, there was a lot of focus on O & G related loans  which only made up a fraction of the bank’s loan books and represented no real threat to its financial standing.

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