From Singapore to Thailand, ASEAN banks tackle loan book risks

Response to interest rate rises, economic headwinds prompt ramp-up in provisions

SINGAPORE/BANGKOK - Banks across Southeast Asia's biggest economies are stepping up efforts to shore up their defenses against potential loan losses amid interest rate hikes, slowing economic growth and geopolitical uncertainty.

DBS Group Holdings, Southeast Asia's largest lender, said on Monday, Aug. 1, that its total allowance for credit and other losses more than doubled to S$1.5 billion ($1.08 billion) in the second quarter as it built up buffers against potential sour loans.

DBS's move is the latest sign that banks in the region are bracing for tougher times ahead as they seek to balance managing risks with maintaining lending growth in a challenging economic environment.

DBS's higher provisions

DBS's higher provisions reflect growing concerns about the potential impact of rising interest rates on borrowers' ability to repay loans.

The Monetary Authority of Singapore (MAS) has tightened monetary policy three times this year, bringing its total tightening to 125 basis points.

DBS's non-performing loan (NPL) ratio edged up to 1.5% at the end of June from 1.4% three months earlier, driven by higher NPLs in the consumer banking segment.

OCBC's caution

DBS's larger rival, Oversea-Chinese Banking Corp. (OCBC), also struck a cautious note on Tuesday, Aug. 2, saying it expects its NPLs to rise in the second half of the year.

OCBC's NPL ratio stood at 1.3% at the end of June, unchanged from three months earlier.

OCBC's management said in a media briefing that it expects the NPL ratio to increase to about 1.5% by the end of the year, citing concerns about the impact of interest rate hikes on borrowers in the consumer and small and medium-sized enterprise (SME) segments.

Thailand's banks prepare

In Thailand, the central bank has also raised interest rates this year, prompting banks to increase their provisions for loan losses.

Kasikornbank, Thailand's largest lender by assets, said its loan loss provisions jumped 62% year-on-year to 5.9 billion baht ($165 million) in the second quarter.

Bangkok Bank, the country's second-largest lender, also increased its loan loss provisions by 30% year-on-year to 6.1 billion baht in the second quarter.

Common theme

The common theme among banks in Southeast Asia is a desire to strengthen their balance sheets in anticipation of a potential rise in bad loans as interest rates rise and economic growth slows.

While the region's banks remain well-capitalized, they are not immune to the global economic headwinds and are taking steps to mitigate potential risks.