DBS Hong Kong has sufficient buffers for property downsides

The bank is expected to maintain strong capitalisation and profitability.

DBS Hong Kong’s strong capitalisation, profitability, as well as its good liquidity will provide buffers against its expanded exposure to property sectors in Hong Kong SAR and China.

The bank is expected to maintain a robust financial profile over the next 12-18 months, Moody’s Ratings stated in a report, where it affirmed the bank’s A1/P-1 long-term and short-term foreign currency and local currency deposit ratings.

This meant that DBS Hong Kong is subject to low credit risk and has superior ability to repay short-term obligations, according to Moody’s rating scale.

Expanded loan book: a mixed bag?
DBS Hong Kong saw its loan book grow by 68% between 2020 and 2023 through loans acquired from DBS Bank, Hong Kong branch. 

As a consequence of these loan transfers, DBS Hong Kong is less exposed to the small and medium-sized enterprises (SMEs) in Hong Kong. 

However, the transfers increased its loan concentration in the Hong Kong property sector. Property development and investment loans now make up 46.6% of the bank’s loans in Hong Kong as of end-2023.

Currently, Hong Kong's property sector is experiencing a protracted downturn that is testing borrowers' financial profiles and repayment abilities, warned Moody’s.

On a positive note, Hong Kong property-related loans are highly collateralized, with moderate loan-to-value ratios. This limits potential credit losses, the ratings agency said.

Overall, the new loans acquired are from large borrowers hailing from the Greater China market, particularly large mainland Chinese companies and Hong Kong conglomerates in the manufacturing and Hong Kong property sector. 

“These large borrowers are usually more resilient than some smaller borrowers during economic downturns because of their robust financial profiles and franchises,” Moody’s said.

Exposure to mainland China's property sector remains relatively low compared to other rated Hong Kong peers. 

DBS Hong Kong also maintained a low impaired loan ratio of 1.1% and an impaired loan coverage ratio of 112% as of end-2023.

Strong capitalisation, profitability
DBS Hong Kong will maintain strong capitalization over the next 12 months, supported by strong internal capital generation. Profitability will likely remain strong as well, bolstered by its resilient net interest income and fee income performance,” Moody’s said

It added that its net interest margin will remain wide as high interest rates support loan pricing and as the bank manages its deposit costs by maintaining its sizable proportion of low-cost current account and savings account deposits. 

The growth of its wealth management business will also benefit its fee income. 

“In 2024, we expect the bank's credit costs to increase moderately, while remaining manageable, amid the headwinds in the macroeconomy and property sector,” Moody’s said.