63% of its revenue are from large corporates.
According to CIMB, it believes that investors’ concerns over local banks’ rising exposure to China trade finance are overblown.
Investors have raised concerns that the trade loans taken on by Chinese corporates have been used to invest in products that fuel the shadow banking industry, instead of funding their business operations.
However, we left the session feeling more confident that DBS is not exposed to such risks as 1) it has a strong due diligence process for trade loans, and 2) 63% of its revenue comes from large corporates and MNCs (the likes of Glencore, GM, Ford and BP).
DBS has seen especially strong growth in commodity names and the measures it has put in place include 1)subscribing to maritime satellite feeds to track the shipment of goods, 2) cross-checking with customs agents on the specifications of the goods shipped, 3) only providing loans to an approved list of suppliers who form a critical part of the customer’s operations, and 4) working only with reputable logistics firms.
DBS also limits its exposure to each industry and geography to reduce concentration risk. With these measures, we think it is unlikely that the loans are being used to fund shadow banking activities though it possible that some of the trade may be fuelled by currency arbitrage given the gap between CNY and CNH. If this gap narrows, some trade volumes may come off but does not pose a risk to NPLs.
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