The US-China trade war has been rumbling on and, naturally, investors have been jittery. In Singapore, this uncertainty has hit sentiment for the three big banks – DBS Group Holdings (SGX: D05), United Overseas Bank (SGX: U11), or UOB, and Oversea-Chinese Banking Corporation Limited (SGX: O39), or OCBC – given all three have at least some exposure to China within their businesses. Any escalation in trade tensions could mean a further slowdown in the Chinese economy.
However, the question on most people’s minds is which bank is the least exposed to China? Let’s take a further look at this crucial question and how we can determine the answer.
China loans exposure
Banks derive the bulk of their earnings by taking in deposits from customers and lending out this money in the forms of loans – either to individuals who may perhaps want a mortgage or corporates that need money as working capital.
Regardless, the loan books of banks can tell investors a lot about banks’ level of exposure to certain sectors/countries because if there’s a downturn or slowdown in an economy, the ability of borrowers to repay these loans could be impacted. With that, let’s take a look at the Singaporean banks’ loan exposure to China.
The largest Singapore bank, DBS, has a well-known presence in Hong Kong and Greater China, with its businesses there (particularly in the former) having helped drive growth in recent years. As at the end of the first quarter of 2019, DBS had total gross loans of S$351.8 billion. By country/region that the bank breaks down its loans by, Hong Kong + Rest of Greater China made up S$54.6 billion and S$51.5 billion, respectively, of the total. That means out of the above loan book of S$351.8 billion, DBS has a total of S$106.1 billion in exposure to what can be classified as “China” loans – equating to around 30% of its loan book.
OCBC is Singapore’s second-largest bank, by market capitalisation, and also owns a well-known wealth management arm; Bank of Singapore. OCBC’s overall loans as of the end of the first quarter 2019 totaled S$259 billion. Of this amount, S$63 billion were classed as loans to Greater China – meaning its total exposure is around 24.3% of its loan book.
Finally, we have the third Singapore bank; UOB. It is generally known as a bank with a stronger focus on Singapore and Southeast Asia rather than Hong Kong/China. This is also borne out by the numbers. As of the end of the first quarter of 2019, out of a total of S$270 billion in loans by UOB, only S$43 billion were classified as loans to Greater China. That means UOB’s total China exposure was approximately 16% of its loan book.
Monitoring the trade war
Overall then, UOB has the lowest level of China exposure out of all three Singapore banks. However, investors should also be mindful that these US-China trade war tensions could die down if an agreement can be reached and, instead of being a potential liability, increased China exposure could actually be a boon to growth for the likes of DBS or OCBC (given the recent robust numbers in their China businesses). But if you’re an investor who is looking for a Singapore bank – with limited China exposure – then UOB looks to be the safest bet.
The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. The Motley Fool Singapore has recommended shares of DBS Group Holdings, United Overseas Bank, and Oversea-Chinese Banking Corp Limited. Motley Fool Singapore contributor Tim Phillips does not own shares in any of the companies mentioned.