DBS' trade finance growth to lag behind overall group loan expansion

In line with greater China region loans.

Loans to the greater China region have been growing at a rapid 3-year CAGR of 51 percent, driven largely by financing of China’s trade business.

According to a research note from Nomura, however, given the rapid growth, exposures to the Chinese banks are nearing their single counterparty limits (determined internally by DBS) and, as such, growth in the bank’s trade financing is expected by Nomura to lag behind overall group loan expansion of between 8 to 10 percent.

The note said that management clarified that the strong expansion is related to the increase in the Chinese banks’ Letters of Credit in recent years, which limits DBS counterparty risk to the top-tier Chinese banks as opposed to taking on corporate credit risk.

Further, management confirmed that asset quality from this business remains robust as there is constant monitoring of each transaction from the source documents (Bills of Lading) to the issuance of the Letters of Credit from the counterparty bank, and eventually to the confirmation with the maritime agencies which track the shipment of goods.

Here’s more from Nomura:

Financing of warehouse inventories, which has recently received much negative media scrutiny, is a small part of DBS’s China business and is so far unaffected by the investigations.

Management has placed strict limits on this segment of the business.

Margins expected to declineq-q but still up y-y. Recall, DBS’s NIMs improved 5bp q-q in 1Q14, which was attributed to: 1) tighter liquidity in the Chinese interbank market which allowed trade finance products to re-price higher; 2) Replacement of interbank lending with higher yielding interbank certificate of deposits (CDs); and 3) replacing of maturing government bonds at higher yields with the steeper yield curve.

Now that China interbank rates have normalised, trade margins are also expected by us to fall on a q-q basis.

Management, however, is still guiding for NIMs to rise by about 2bp y-y.