A notable difference between DBS and the other two local banks is that it has around $2.4 billion in management overlay, which it can choose to write back in the unlikely event of a surge in specific provisions, namely, expected credit loss (ECL) 3.
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Interestingly, UOB and DBS are not the only financial institutions that have made larger general and specific provisions for Hong Kong commercial real estate (CRE). HSBC made a large provision of US$700 million ($883 million) in 3QFY2025 for Hong Kong CRE, up from US$100 million in 3QFY2024. In an announcement on Feb 25 regarding its FY2025 results, HSBC reported ECL of US$3.9 billion, up from US$400 million in FY2024. “The higher ECL reflected higher allowances for new defaulted exposures, the impact of an oversupply of non-residential properties that has put continued downward pressure on rental and capital values, and updates to our models used for ECL calculations,” HSBC said. Credit costs in FY2025 were 39 basis points (bps) of average gross loans and the forecast for FY2026 is 40 bps.
In terms of credit costs, DBS reported 19 bps of specific provisions for FY2025, but the 4QFY2025 figure surged to 36 bps due to the $415 million charge. DBS group CEO Tan Su Shan said: “You can infer its size from our disclosures that it is less than half a billion. To reiterate, it is a subjective NPL [non-performing loan] because the customer has not defaulted. Our total China real estate exposure is about $10 billion, of which $4 billion is to SOEs [state-owned enterprises], $4 billion to strong foreign entities, like the Singapore-based Temasek-linked companies, and $1 billion is to privately owned enterprises [POE], of which the LTV [loan-to-value] is about 50%. So, I think we are fairly comfortable. We have already taken quite a lot of GP [general provisions] as the Chinese market started to correct a few years back, so we have a buffer. Our total GP overlay is $2.4 billion.”
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On the NPL downgrade, which caused the $415 million SP in 4QFY2025, Tan of DBS adds: “We are being prudent as there were signs of liquidity pressure. If a commercial restructuring occurs, we might have a writeback. We have been conservative and prudent.”
UOB’s pre-emptive move to top up GP in 3QFY2025 caused total credit costs to spike to 134 bps. This fell to 19 bps in 4QFY2025, with FY2025’s total credit costs at 55 bps. This year, credit costs are expected to normalise to the 25 bps to 30 bps range.
OCBC did not report elevated credit costs for FY2025. Total credit costs for FY2025 were 17 bps, with 4Q2025 total credit costs at 20 bps. What has OCBC done that the other two banks haven’t? New OCBC group CEO Tan Teck Long, who was chief risk officer at DBS before joining OCBC in 2022, unveiled a refreshed strategy for growth, focusing on double-digit growth in capital-light non-interest income and a pivot to Asean, after years of the banking group looking to North Asia for growth. He is also the first Singaporean to helm the bank in more than 25 years.
“We took a very conservative view on credit policy. Hong Kong CRE is a thermometer focusing on real estate issues. Therefore, even before the stress started, we started to take positive action. We had actually stopped growing the loan book and de-geared that part of our growth in Hong Kong. We are still growing, but we are focusing on loans to quality customers,” Tan of OCBC explains.
“Secondly, when it comes to provisioning, we have already managed our cases. We have been very proactive in downgrading the cases. We proactively downgrade cases, so ECL 2 increases and there is a buffer zone before we reach ECL 3. Then we downgrade to ECL 3. That provisioning is quite conservative. So ultimately, there’s a buffer zone before we get to ECL 3 where the situation warrants,” he describes.
UOB’s credit costs subsided in 4QFY2025. During a results briefing on Feb 24, group CFO Leong Yung Chee said the bank has sufficient buffers to navigate global geopolitical volatility.
“Given some of the macro conditions, there are still some potential challenges to be navigated. We have already preemptively anticipated many of these. What we see in our pipeline as potential hotspots, we set aside $615 million in the last quarter because we anticipated some of them. Our buffers that we have put aside allow us to navigate these potential hotspots and stay within our guidance of credit costs between 25 bps and 30 bps,” Leong explained.
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When asked about the management overlay, Leong is reluctant to give a figure. However, he points to a general provision buffer of 1%. “I’ll emphasise that the GP buffer that we put aside is 1% and if you look between 3QFY2025 and 4QFY2025, even though we raised it to 1% as of 3QFY2025, it is still at 1% as of 4QFY2025. It’s enough to support our unsecured portion. It’s something very important to note: the unsecured number. When evaluating credit costs, several metrics are worth considering. The unsecured number is, after taking collateral into account, at 254%, we are actually very well covered,” he elaborates.
One of the portfolio’s stresses was US CRE. The clients include network clients from Asia who have decided to operate in the US. “There are some who are our global financial institutional clients as well,” Leong says.
Operating metrics remain stable
Separately, the sharp decline in the three-month compounded Singapore overnight rate average (Sora) from around 3% in January 2024 to 1.14% in mid-January this year appears to be over, with Sora stabilising at 1.14%. Maybank Research sees net interest margin (NIM) compression stabilising. On the loan growth front, Maybank says local banks may expand into construction, manufacturing and small and medium enterprises (SMEs) this year, easing pricing pressure on banks and providing NIM support.
On asset quality, the troublesome Hong Kong CRE loans appear manageable with buffers in place, and credit costs normalising to approximately 20 bps to 30 bps this year. Still, capital management is likely to be more conservative with fewer returns to shareholders going forward than in 2024–2025.
Analysts differ on how they see the banks. Macquarie has OCBC as its preferred pick among the local banks. On the credit cost front, Macquarie says “non-performing asset formation was uneventful, and OCBC held onto its sector-leading coverage ratios”.
Citigroup Research chimes in with “while UOB managed benign provisions (the outcome), the market was likely disappointed on elevated NPA formation, while movement in provision balances between Greater China and the US saw mixed investors’ reactions. Given DBS/UOB dividend yield spread at 1.2%, we expect DBS to see relative outperformance.”
JPMorgan’s firm favourite remains DBS. For OCBC, JPMorgan says that it had forecast 18-bps credit costs for 2026. However, group CEO Tan has guided for 20 bps to 25 bps of credit costs. “Let’s bear in mind that we are at the beginning of the year. I’m a little crystal-ball-gazing through the cycle of credit costs. We hope to do better than that. We continue to monitor and track the Hong Kong portfolio for real estate,” he says.
