What will keep costs elevated?
While some of chunky NPAs from O&G segment have been provided for, there is always a risk of one-off hits. Further, there is risk of more granular NPLs from SME/retail exposures, says Jefferies. These are likely to keep credit costs from declining on YoY basis.
Here's more from Jefferies:
Banks have been managing credit costs by lowering general allowances and possibly using a wide range of assumption related to collateral valuation and recovery rates.
Over past three years, DBS has lowered its provisioning levels for good loans; OCBC has increased its provisioning while UOB has seen a significant dip over last two quarters (though levels stay higher than its peers).
Similarly, to address the uncertainty around collateral valuation related to O&G sector, we look at SP/NPL ratio. Ideally, we will like to see higher SP coverage for bad assets suggesting more conservative assumption around collaterals and recovery.
SP coverage has increased over the last couple of quarters for the banks with UOB being most aggressive. This gives us some comfort that UOB probably is most conservative around collateral valuation. OCBC's coverage level continues to stay below peers while DBS has trended down for the period.
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