Credit Risk: How DBS Group Holding Ltd Manages This Vital Risk

DBS Group Holdings Ltd (SGX: D05) or DBS in short, is one of the three major banks based out of Singapore, along with United Overseas Bank Ltd (SGX: U11) and Oversea-Chinese Banking Corp Limited (SGX: O39).

As a bank, DBS Group faces a number of important risks that it has to manage on a daily basis. Failure to do so effectively and efficiently could cause significant damage to its business, and subsequently shareholders’ returns.

Investors will need to understand the risks that a typical bank faces, and how it intends to manage those risks. Today, we will explore one of the most important risks – credit risks – and how DBS Group manages its risk.

But first, what is credit risk?

In simple terms, credit risk is the risk of default on a debt that may arise from a borrower failing to make the required payments to the bank.

In the case of DBS Group, its credit exposure include “lending to retail, corporate and institutional customers; trading endeavors such as foreign exchange, derivatives and debt securities; and the settlement of transactions.”

So, how is the bank planning to address credit risk?

From DBS Group’s 2016 annual report, the bank’s credit risk management can be summarized into three building blocks, namely policies, risk methodologies and processes, systems and reports.

In the first building block, senior management sets the overall direction, and policy for managing credit risk at the group level. These policies help to maintain a consistent approach in risk identification, assessment, underwriting, measuring, reporting, and risk control. The principles  act as the foundation by which the group conducts its credit risk management and control activities.

The second building block are the actual methods used to manage credit risk. The bank’s approach centres around understanding its customers, their businesses and the industry which it operates in. DBS Group uses rating agencies, internal credit models, and statistical models to assess these risks.

Furthermore, the company also focuses on risk diversification, and country specific risk management to ensure that it’s not overly concentrated in a particular business segment or country.  Stress tests, driven by regulatory or internal requirements, are conducted on a regular basis.

Last but not least, DBS group uses processes and systems to control, monitor and reports the credit risks within the group. Such systems and processes ensure that the appropriate policies and procedures are followed. Any early warning alerts or critical credit trends are reported to credit committees to be evaluated.

In sum, DBS Group views credit risk as one of the most important risks.

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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 contributor Lawrence Nga doesn’t own shares in any companies mentioned. Motley Fool has a recommendation for United Overseas Bank and DBS Group.