Resilient bank stocks fraught with hidden risks, analysts warn

Bad loans and shrinking balance sheets aren't the only red flags.

Singapore’s largest banks look tough on paper: the proportion of non-performing loans is low and their balance sheets seem generally sound. However, the rosy picture becomes slightly marred when analysts scrutinized often overlooked sources of risk, namely, investment portfolios, commitments and contingent liabilities, derivatives and movement within Other Comprehensive Income.

A report by Jefferies said that there is a reason to be cautious when banks are judged against these metrics.

For instance, all three banks’ investment portfolio mix have shown a definite shift towards non-government bonds and Greater China securities, which could increase credit risk in times of economic turbulence.

The banks' credit commitments and contingent liabilities have also grown faster than their balance sheets, exceeding that of peers like StanChart and ANZ.

"Since 2011, while balance sheet has grown between 24% to 29%, these off-balance sheet items have grown by 50% to 69%. UOB has grown the fastest, though relative to balance sheet size DBS leads followed by UOB. In fact, growth has exceeded that of peers like Stan Chart and ANZ," said the report.

Although risk from their derivatives book is hard to quantify, Jefferies highlighted that "a few shades of grey exist" for all the three banks in terms of this metric.

“Multiple hidden risks exist aside from loan impairments and balance sheet shrinkage. Historically, bank share price performance negatively correlates with declining/negative GDP growth for Singapore and forecasts are being cut. Currency risk also needs to be factored in for USD return. These concerns, along with the specter of shrinking balance sheet, loan impairments and above-book valuations, keep us on a cautious footing,” said the report.