China debt crisis fears overdone, says DBS chief

Piyush Gupta says the bank has “zero exposure” to Qingdao port and no exposure to collateral financing in China.
Piyush Gupta
Piyush Gupta

Piyush Gupta, chief executive of Singapore’s largest lender DBS, said fears of a looming debt crisis in China are “overdone” at the bank's results briefing on Friday.

His comments come amid increasing investor concerns about China’s rising corporate leverage and bad debts within its banking system.

Meanwhile, reports of fraudulent loans in Qingdao port have fanned fears among banks with exposure to collateral financing in China. Banks including HSBC, Standard Chartered and ABN Amro have exposure to the Qingdao financing. 

According to Gupta, DBS has “zero exposure” to Qingdao Port and no exposure to collateral financing in China. And, while the risks in China are growing, he said that the issues are specific to certain sectors. 

He described China as having a “two-speed” economy, where certain sectors such as property, construction and steel are struggling while others such as fast moving consumer goods and exports from Southern China to Europe are still robust. 

DBS has S$50 billion of loans to Chinese companies, of which S$36 billion are trade loans and, according to Gupta, DBS has not seen any signs of stress in its China book. DBS’s non-performing loan ratio stood at 0.9% during the second quarter.

Gupta pointed out that other countries such as Japan have debt that amounts to 400% of GDP and has “not yet collapsed” while the US was able to survive in spite of putting $700 billion into TARP.

Compared to other countries, China's total amount of debt is “not off the charts” he said. According to a recent research report by Standard Chartered, China’s total debt to GDP is 251%. “The overall assessment that China is going to have a major crisis is quite frankly overdone,” said Gupta.

One advantage that China has is that, on a systemic level, it is able to service its debt, with $4 trillion of foreign exchange reserves, said Gupta. This gives it the ability to recapitalise its banks, if need be.

However, Gupta warned that it is important to focus on the right businesses. “If you are in the wrong business with the wrong counterparty, you will get hurt,” he said. 

The bank has slowed lending for its trade finance business - a key piece of the business for the Singapore lender - and trade loans fell 2% in the second quarter.

However, Gupta said DBS would keep growing that business. “It’s a crucial part of the business, we are just being circumspect after the noise in Qingdao,” he said. “We will fully expect to grow the trade [finance],” he added.

DBS’s non-performing loan (NPL) ratio of 0.9% during the second quarter was lower than its peer United Overseas Bank, which reported an NPL ratio of 1.2%. UOB's NPLs rose 11.2% from the previous quarter to S$2.31 billion.  DBS's NPL ratio for the mortgage sector stood at about 0.2% and Gupta attributed this relatively low level of NPLs to the bank’s higher level of owner occupied home loans than its peers.

DBS's net profit for the first half crossed S$2 billion, due to higher net interest margin, loan volumes and annuity fee income, which offset lower trading income.

Asian rivals bulk up 

Regional banks have shown greater appetite for acquisitions and, while open to opportunities, DBS will only consider acquisitions if they make sense for the bank, said Gupta.

Singapore’s third-largest lender OCBC last week gained acceptances for 94.5% of Hong Kong's Wing Hang Bank while Malaysian banks RHB and CIMB have started talks to merge and could form a banking colossus.

DBS’s plans for expansion into Indonesia were thwarted when it walked away from acquiring Bank Danamon last year as regulations did not allow it to take a majority stake.

And, despite having a new president in Indonesia, little has changed to allow it to buy a bank in Indonesia.

“Today in Indonesia, the law lets you buy 40% of a bank, it is very hard to make a deal work at that kind of ownership,” he said Gupta.

However, he reiterated that the bank was open to any deals, particularly in its three main markets -China, India and Indonesia - that made sense.

“While our principal agenda is organic [growth] we are always open to opportunities. If the right opportunity comes along in any of three principal markets and maybe Malaysia at some stage, we are open to it,” said Gupta.

DBS agreed to buy Societe Generale’s Asian private banking business in Singapore and Hong Kong for $220 million in cash in March and the deal is expected to be completed in early October. 

¬ Haymarket Media Limited. All rights reserved.
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