CIMB predicts 15-20bp NPL increase for DBS, OCBC, UOB

Credit costs will increase 8% in 2013.

According to CIMB, loan allowances stayed low in 2012 as there were hardly any signs of bad debt.

NPL ratio has been on the downtrend for DBS and held stable for OCBC. Over the year, only UOB had an increase in NPL ratio in 3Q12 due to a problematic transport-related account, but even that has come off in 4Q12.

Here's more from CIMB:

DBS and UOB continued to pad up provisions even as NPL ratios declined generally. Provisioning coverage is now 142% for DBS and OCBC (2011: DBS – 126%; OCBC – 107%).

UOB’s provisioning coverage fell from 136% in 2011 to 124% in 2012 due to the aforementioned. Credit costs for UOB is likely to be larger compared to peers in the coming quarters as it tries to normalise its provisioning coverage to industry norm.

We maintain our view that NPLs will not spike in 2013. The key challenge for corporates today is slowing topline growth, not balance sheet issues. Having said that, Eurozone woes and the sequestration in the US is likely to have an impact on the global economy and could pose risks to our assumptions.

Nonetheless, corporates are cashed-up and have reined in expansion plans, the LTVs on the banks’ mortgage book are in the 50-60% range and the recent cooling measures should help control asset quality.

While SMEs in Singapore could face cost pressures as foreign labour tightens and some bankruptcies are inevitable, this should not contribute to an outsized spike in NPLs for the Singapore banks.

Nevertheless, we think that the current low levels of credit costs is likely to increase in coming quarters as provisioning normalises. We are pencilling in 15-20bp increase in NPL for all three banks. We expect credit costs to increase around 8% in 2013.