Will Banks In Singapore Be Affected By Potential Problems In China’s Banking Sector?

The global financial crisis is still fresh in the minds of many investors even though it had happened eight years ago.

Highly-leveraged banks – which were mostly found in the US and Europe – suffered when the subprime housing market bubble in America burst. When the US investment bank Lehman Brothers filed for bankruptcy, shockwaves were sent throughout the global banking industry. That day, investors realized just how connected the global financial markets are.

Although the three major banks in Singapore – namely, DBS Group Holdings Ltd (SGX: D05)Oversea-Chinese Banking Corp Limited  (SGX: O39), and United Overseas Bank Ltd (SGX: U11) – only had minor exposure to America, they too saw their businesses decline during the financial crisis.

The trio’s net profit slipped by 10% to 15% in 2008 and their share prices had collapsed together with the overall market, falling by as much as 60% that year.

Could there be a case of déjà vu now? There are media reports appearing that touch on the vulnerability of the Chinese banking sector. Non-performing loans in China are rising and many analysts are estimating actual losses to be much higher than the Chinese government’s official numbers.

Some economists are also predicting that the Chinese banking sector would need a government bailout in the next few years that could possibly cost more than US$500 billion. If the Chinese banking sector is really heading for trouble, what does it mean for Singapore’s banks?

An approaching storm

Now here is the scary part. Singapore’s banks are exposed to the Chinese banking sector – they have branches in the Greater China region and do banking business there. At the end of 2015, 9.1% of DBS’s total assets were located in China. The selfsame numbers for OCBC and UOB are 18.3% and 10.4%, respectively.

Moreover, the Chinese banking sector is actually larger than the US banking sector; in 2015, the former made more than US$308 billion in profit while the latter had raked in ‘only’ US$206 billion. Four of the top five largest banks in the world by assets are also Chinese banks.

So, if a storm is indeed brewing in the Chinese banking sector, the shocks for Singapore’s banks might be even more severe than what had happened in the 2008 financial crisis.

A safe anchor

But at the moment, no one knows for sure what the situation really is like – most predictions are merely guesswork. It’s worth noting that the major Chinese banks are currently better capitalized as compared to the big US banks in 2007 and 2008. The Chinese banks’ stronger balance sheets might allow them to weather any storms on their own.

A Fool’s take

The situation is murky right now with China’s banking sector. But developments in that area is something investors should keep an eye on going forward.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Stanley Lim doesn’t own shares in any companies mentioned.