Singapore’s lenders have long benefited from the city state’s large populations of citizens of Indian and Chinese heritage. This has improved access to respective markets. The largest Singaporean bank, DBS, has just delivered an earnings beat on expectations for the last quarter. But DBS and its peers may now benefit less from diversification than hoped.
Net income at DBS jumped 69 per cent to S$2.3bn ($1.8bn). Rising interest rates, a write-back of general provisions and loan growth have boosted earnings. The net interest margin rose to more than 2 per cent. Returns on equity hit a quarterly record of 17.2 per cent. Bad debt levels fell.
Most strikingly, DBS disclosed an exposure of about $1bn to the Adani Group. US short seller Hindenburg Research has accused the Indian conglomerate of accounting fraud and stock manipulation, claims that Adani vehemently denies.
Adani has made a virtue of syndicating banking transactions by portfolio companies beyond its home country. DBS has meanwhile been pushing into the Indian market. It even took over a distressed Indian bank in 2020.
This has made strategic sense. Singapore’s growth is slowing. India has been growing fast.
DBS is not badly exposed to Adani. Three-quarters of the total exposure is to the acquisition financing of a cement business. Its cash flows are ringfenced. The company has strong sales in its local market, 14 per cent of the total.
The confident stance of DBS boss Piyush Gupta should not deter investors from pondering the risks the Indian market poses, however. The Adani affair has highlighted weaknesses in the finances and regulation of some big Indian businesses. Foreign lenders are becoming reluctant to participate in refinancings.
Singaporeans have meanwhile invested heavily in wealth management services targeted at mainland Chinese clients. Chinese regulators are now cracking down on capital outflows. They banned online brokerages based in offshore locations soliciting new business from mainland investors in December. On Monday, several Hong Kong-based brokerages stopped opening accounts for these clients.
DBS trades at more than 1.8 times tangible book value, nearly double that of Asia-focused peers such as HSBC. The substantial premium reflects overseas growth potential. Shareholders should question whether this is justified, given challenges in two key foreign markets.
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