“Why are we adding up to $200 million in management overlay? The short answer to that is this high interest rate environment is not precedented. Therefore, we're just being abundantly prudent and cautious in case there is some stress that comes out of the system,” Gupta says. While banks do not have to reveal their management overlays, DBS is likely to have around upwards of $2.2 billion in overlays.
Its non-performing loan ratio was unchanged q-o-q at 1.1%. “The 1.1% number doesn't show it but NPLs came down by $300 million. That’s partly because of low new NPA formation and we’ve also been getting repayments on some of our old NPLs,” Gupta explains.
The unprecedented rate of interest rate hikes has given rise to stresses in the US. Among them are concerns over the commercial property market, in particular office property. This in turn has caused some S-REITs with US office properties to tumble in price as investors re-calibrate the potential valuation declines these office properties could suffer. In addition, a couple of Chinese S-REITs are having problems refinancing their loans.
“The bulk of our commercial property exposures, 90% of it is in Singapore and in Hong Kong. Our clients are among the top conglomerates, the big “hongs”. The residual 10% of our commercial property book is around the world, it includes the US, the UK, and China, and they are again very high-end obligors. All our stress testing against that hasn't given us any cause to worry. Our average LTVs on the commercial property book are relatively low, in the 40% to 50% range,” Gupta says. “I don't have specific data with respect to S-REITs on me, but all the stress testing that we've done on the entire portfolio has covered everything.”
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Gupta also explained why DBS is guiding for a NIM that is lower than 1Q2023’s 2.12%. “The increase in rates is pretty much passed through. We don't think Federal Funds Rate is going to go up much more. We don't expect a reduction in rates. But during the year, we think another $30 billion to $40 billion of deposits have to reprice and that repricing means the cost of funding will gradually go up,” he says.
