Safest Banks and Strongest Banks, What Happened To Stanchart Can Happen Anywhere

Coming across the 2014 Safest Banks award published by Global Finance and Bloomberg’s 2014 Strongest Banks rankings, I came to realise how lame they were.

If you go back through the years, you will find that the Chinese and Canadian banks were right on top back in 2010-2012 before dropping off in recent times.

strongest banks in the world

Source :

http://www.bloomberg.com/visual-data/best-and-worst//worlds-strongest-banks

https://d2tyltutevw8th.cloudfront.net/media/document/global-finance-names-the-worlds-top-50-safest-ban-1410210873.pdf

That said, Singaporean banks usually feature prominently in those lists because Singapore banks thrive on getting the criteria right all the time, like the way Singaporeans approach exams.

It is worth noting though that Singaporean banks are losing out in their rankings this year, with OCBC dipping to No. 4 from their former 2nd and 1st place in the previous 2 years.

The methodology for both differ greatly, with Bloomberg using 5 criteria.

1. Tier 1 Capital to Risk-Weighted Assets
2. Nonperforming Assets to Total Assets

3. Loan-Loss Reserves to Nonperforming Assets
4. Deposits to Funding
5. Efficiency (Costs to Revenue)

Global Finance, on the other hand, relies on the evaluation of the banks’ Moody’s, S&P and Fitch long term debt ratings and also considers the total assets of the entity, drawing from the pool of the largest banks worldwide.

Winners were selected through an evaluation of long-term credit ratings— from Moody’s, Standard & Poor’s and Fitch—and total assets of the 500 largest banks worldwide.

Both methods have their merits.

Before Stanchart came out last week for the very first time with their very first quarterly result announcement cum warning, most analysts have them rated as a Buy or Neutral which is evident in the complacency in their 5Y subordinated credit default swap prices (cost of credit protection) that shot up late Sept.

Stanchart 5Y CDS

The bank then came out to warn that bad debts may rise in key markets like India and China.

impairments for the third quarter rose to $539 million from $250 million in the same period last year, as a small number of corporate and institutional clients were hammered by weak commodity markets. The bank took a $175 million provision earlier this year to cover its exposure to suspected commodities fraud in China.http://in.reuters.com/article/2014/10/28/stanchart-results-idINKBN0IH0AV20141028

Initially I thought it was the Qingdao scandal but that $ 175 mio was already provided for earlier this year.

Thus, I was pretty amazed and proud that Singaporean banks have not suffered the same this round, in their earnings announcements, all coming out rosy and good and business as usual and extraordinary growth opportunities coming our way.

OCBC Loan Growth

 

DBS Loan Growth (which makes me feel retarded because it took me a while to understand all those bars)
dbs loans
UOB Loan Growth

 

Non Performing Assets and NPL Coverage

UOB +1.2%;  +146.8% coverage
http://www.uobgroup.com/assets/pdfs/investor/financial/2014/newsrelease_3Q-FY14_Results.pdf

OCBC +0.7%;  +155% coverage
http://www.ocbc.com.sg/assets/pdf/quarterly-results/2014/OCBC%203Q14%20Results%20Presentation.pdf

DBS +0.9% (unchanged and lower than last year); +160% coverage
http://www.dbs.com/iwov-resources/pdf/investor/financial-performance/2014/3Q14_presentation_slides.pdf

Non Performing Assets remain very tame for all of them except for UOB which admitted to NPL contributed primarily by borrowers investing in a particular high-end residential project in Singapore (source : BT http://www.businesstimes.com.sg/companies-markets/more-bad-home-loans-popping-up-in-banks-non-performing-loans) and a few non performing loan accounts in Thailand and Indonesia (source : UOB news release http://www.uobgroup.com/assets/pdfs/investor/financial/2014/newsrelease_3Q-FY14_Results.pdf) and shipping (according to JPM Equity Research).

UOB NPL BY SECTOR

UOB NPL BY SECTOR

 

The BT article also mentioned that OCBC is seeing its NPL rise from high end housing loans in Singapore. (although it does not seem that bad, looking at this slide)

ocbc npl

No mention of anything at DBS, although I note that their overdue loans are growing and they will probably be boosting that debt collection team soon.

dbs npl

Some Observations

* Not alot of loans impaired despite loans growing which is a sign they must have extremely competent risk staff and complex risk systems that would put Stanchart to shame !

HSBC should look to poach these risk managers from our local banks at this rate, because “nearly one in 10 HSBC employees now works in risk and compliance, in a jobs explosion …..” http://blogs.wsj.com/moneybeat/2014/11/03/hsbc-third-quarter-earnings-key-takeaways/

* I note that all 3 banks have registered a big growths in trading income (UOB +37% yoy, DBS +8% yoy and OCBC +24% yoy).

Trade on ! as the rest of the world shuts down their trading desks and prop desks as Singapore continues to defy Dodd-Frank (have not got latest updates).

Q : Is there any risk in trading income ?
A : No, if your clients are all in house or from your retail bank.

* All 3 are now growing quickly in the wealth management business and generating fee based income.

Finally, the loan deposit ratios of all 3 look healthy.

UOB : Group 85.8% SGD 94.1% USD 70.6%
DBS : Group 86% SGD 78% Non SGD 95%
OCBC : 85.5%

It would seem that UOB is running more SGD loans and DBS is doing the opposite and UOB would be short of SGD funds because 85% should be the breakeven level.

I note that DBS share price is at a 5-6 year high, not quite for OCBC and UOB.  DBS also happens to be the top arranger of local corporate bonds in Singapore which beats giving the corporates a DBS loan.

We should take heed that risks will come from regional expansion and for all the mighty prowess of our local banking champions, what can happen to Stanchart can happen to any of us. Because in investing, which includes buying bonds, bad things can and do happen, even if you have 1 out of 10 employees watching for risks.