How safe are banks in Singapore and Hong Kong?

Size: px

Start display at page:

Download "How safe are banks in Singapore and Hong Kong?"

Kory Griffith
5 years ago
Views:

1 How safe are banks in Singapore and Hong Kong? With increasing financial calamity around the world and a heightened likelihood of a global recession and another financial crisis, it s crucial to re-examine how safe are certain elements of our Plan B. It s important to do that from time to time as circumstances inevitably change. We emphasize this a lot in SMC there s nothing that s risk-free, especially in finance today. So we decided to perform our own sensitivity analysis for the banking systems in Singapore and Hong Kong, which are two of our preferred banking jurisdictions. We used Hang Seng in Hong Kong and DBS in Singapore as two proxy banks that are representative of their respective jurisdictions. First, let s look at the loan-to-deposit ratio, which tells us how much exposure do customer deposits have towards loans that the bank made. BANK LOAN-TO-DEPOSIT RATIO DBS 90% HANG SENG 69% A lower loan-to-deposit ratio is better, so Hong Kong (Hang Seng) s 69% is better than DBS in Singapore; 90% at DBS is a bit high, but not a significant concern. In general, we found the loan-to-deposit ratio pretty consistent with all banks in both jurisdictions, save for Hang Seng in Hong Kong, which generates about 30% of its business from fee-based services, so in general they do make fewer loans. Another metric we looked at was Capital Adequacy Ratio (). This is what was developed after the 2008 crisis

2 under the so-called Basel Rules to monitor the risk exposure for a bank s capital. s in Hong Kong and Singapore have relatively high Capital Adequacy Ratios, which stand significantly above the required minimum levels for each jurisdiction. BANK TIER 1 TOTAL DBS 13.5% 15.4% HANG SENG 19.1% 22.1% DBS 13.5% Tier 1 ratio is substantially higher than its 8% minimum requirement. In Hong Kong, which has a 6% minimum, Hang Seng is highly capitalized. We then took a deeper look at the banks loan portfolios to get a sense of their exposure to different geographies, i.e. how highly exposed are the banks to China s economic distress? LOAN PORTFOLIO BY REGION (%) Singapore Hong Kong China Rest of Asia Rest of World DBS 47% 18% 16% 9% 10% HANG SENG 0% 82% 14% 0% 4% As you ll notice, both banks have some China exposure, but far less than their core loan portfolios. We then looked at the banks non-performing loan ratios (known in banking as NPL ratios). This figure tells us what percentage of the banks loans are more than 90 days behind schedule in their payments. Clearly this is an important number because banks make those loans with their depositors cash. It s rare to have an NPL rate of 0.00%, especially for such a large bank. But ideally you want to see NPLs at 1% or less. NPL BY REGION (%) Total NPL ratio Singapore Hong Kong China Asia Rest of World DBS 0.97% 0.37% 0.85% 0.86% 3.24% 1.51% HANG SENG 0.36% 0.00% 0.29% 0.85% 0.00% 0.03% There s a lot of speculation about what will happen to the NPL ratios for Asian banks loans to Chinese businesses if the economic distress in China continues, or worsens. 2

3 Some estimates point to NPLs reaching anywhere from 6% to 10%. So we ran our own analysis to see what would happen to the banks capital ratios (annotated as T1, or Tier 1 Capital Adequacy Ratio), as well as the banks profits (annotated as, or Earnings before Interest and Taxes), if the NPL ratio for the Chinese loan portfolio reached 5% and 10%. T1 at 10%: at 10%: T1 DBS -19% 13% -38% 12% HANG SENG -12% 18% -24% 17% With a scenario that non-performing loans for these banks in China rise to 5%, all banks in Singapore and Hong Kong should be able to comfortably cushion the blow and manage to stay well above the mandated minimum capital ratio, because of their significantly high Tier 1 Capital Adequacy Ratios. Should NPLs in China rise to, say, 10%, there will be substantial declines in profitability across the board, but their capital reserves should still remain relatively high 12% for DBS and 17% for Hang Seng, respectively. That is, of course, assuming that nothing else happens around the world, and that Hong Kong will remain largely insulated from the loan problems plaguing China. In the case of Hong Kong NPL ratios increasing as well, we can expect the following: at 5% AND Hong Kong NPL at 5% AND Hong Kong NPL at 10% AND Hong Kong NPL at 10% AND Hong Kong NPL T1 T1 DBS -30% 12% -60% 11% HANG SENG -46% 15% -93% 12% Because of Hang Seng s heavy reliance on Hong Kong, which comprises 82% of its loan portfolio, it stands to take a rather large hit on any sharp uptick in Hong Kong NPLs. (the bank s pretax profit) could be nearly wiped out on a 5% NPL in Hong Kong, coupled with a 10% NPL in China. But again, due to very high and conservatively positioned capital adequacy ratios today, such a scenario would theoretically still put the bank safely above the required minimum capitalization i.e. the bank wouldn t go under, it would just have a bad year in terms of profits. 3

4 Stockholders won t be happy, but depositors will still be OK. Hong Kong s banking industry NPL has been as high as 7.3% during the 2000 recession. So perhaps the above table is still not conservative enough. In the event that NPLs in Hong Kong do reach those levels (let s put it at 7.5%), coupled with a 15% NPL ratio in China, Hang Seng would see its profitability wiped out. But even under this nightmare scenario, Hang Seng s Tier 1 Capital Adequacy Ratio would fall to around 8%, still above Hong Kong s minimum required levels. Singaporean banks would largely be in the clear under this scenario until we see an uptick in s. On average, Singapore banks have about 50% of their loans in Singapore, with only 24% in China and Hong Kong combined. So let s include Singapore in the fray, where NPLs also peaked at 8% back in at 5% AND at 5% AND T1 at 10% AND at 10% AND T1 at 15% AND at 7.5%: at 15% AND at 7.5%: T1 DBS -59% 11% -118% 8% -177% 6% Under this scenario DBS would still maintain the minimum Capital Adequacy Ratio mandated by the Monetary Authority of Singapore at 8%, even if China s NPL levels spike to 10%, and Singapore s NPL levels reach 5%. Should Singapore s NPL ratio hit 7.5%, DBS would find itself below the minimum capitalization threshold and would need to raise additional capital. But even if DBS is below the minimum, it still has positive capital meaning that depositors would still be OK. Since the Singapore government is one of the major shareholders in DBS, we don t see a significant danger should Singapore, Hong Kong, and China all see a dramatic increase in non-performing loans. Conclusion Both Hong Kong and Singapore stand out as excellent banking options. Singapore has long been called Asia s emerging financial center. This is now a misnomer. Singapore has emerged. And it has already overtaken Hong Kong as the leading international financial center in Asia, if not the world. As a matter of fact, Singapore has been the recipient of more Foreign Direct Financial Investment than New York, London, and Hong Kong for several years now. 4

5 This is underpinned by the low tax environment, laissez-faire government, economic liberalism, strong currency, and a well-capitalized banking system. Singapore s government has zero net debt. And despite some of the lowest taxes in the developed world, Singapore still runs a healthy budget surplus each year as does Hong Kong. It s also important to note that Singapore has never had a banking failure in its history, ever. And while past performance is no guarantee of future results, the entire banking system continues to maintain conservative levels of capitalization and liquidity certainly much more than banks in the West. If there is a risk in Singapore s banking system, it is from exposure to the country s real estate market, which is due for a decline. s in Singapore have significant exposure to the local real estate market through mortgages and commercial loans. Property prices have been rising for years... to the point that Singapore is one of the most expensive places in the world to buy an apartment. Looking at ratios for property prices and income, it s clear that the real estate market needs to correct. And it probably will... especially when interest rates start to rise. But the banks in Singapore have been working diligently to increase- their reserve capital, improve asset quality, and increase profitability. It s as if they re looking out into the future and taking proactive steps against potential risks. What a novel concept. One last point about banking in Singapore; because it has become an international business hub, the banking environment is very innovative and competitive. Transaction costs are low, and the ease of doing business is fantastic again, just like in Hong Kong. As for Hong Kong we recently wrote about it extensively (see here). It is a top-tier jurisdiction with, in many respects, even more superior banking system fundamentals than Singapore. Bottom line both Hong Kong and Singapore are still excellent banking jurisdictions and soundly pass our internal stress tests to withstand a major crisis. But remember nothing is risk-free, especially in finance today. So I would again urge you to consider our recommended three-part strategy to protect yourself from shocks in the financial system: 1. Hold physical cash, preferably in lower denominations this protects you from banking crises. 2. Hold savings in safe banks in stable jurisdictions overseas Singapore and Hong Kong banks fit this category. 3. Own physical gold; some with you locally potentially, but a bulk stored at a secure facility overseas this protects you from crises in the monetary system, i.e. if entire currencies start losing value. For more on the latter option, we sent out a Black Paper on this very topic last week. 5

2012 US HIGH YIELD MARKET OUTLOOK

2012 US HIGH YIELD MARKET OUTLOOK Q1: What are the impacts of the prolonged interest rate environment, fiscal budget tightening and possible QE3 to the US High Yield Market? So, it's really impossible to look at each of those variables