Here's why DBS is not stressing over its steadily shrinking trade book

Trade finance is still a key growth pillar.

Slowing economic growth will not dent DBS's strategy of boosting its presence in trade finance, according to a report by CIMB.

Although DBS's trade book has shrunk from $62 billion in the second quarter of 2014 to $53 billion in the third quarter of 2015, CIMB said that the drop is expected to bottom out in the first half of 2016 due to the growth in open account trade (OAT).

The growth in open account trade will offset the falling demand for traditional letter of credit-backed trade finance (EBLC), CIMB said.

"We see room for margin improvement in DBS’s trade book, driven by better funding mix and the shift from lower-margin EBLC to higher-margin OAT loans," said CIMB.

"EBLC loans continue to come under margin pressure, with average loan spreads of 50-100bp, but should be offset by the growth in OAT loans, which command an average loan spread of 170bp," the report added.

In addition to trade finance, DBS also plans to invest $60m in 2016 to 2017 to offer new solutions and grow its cash management business.

“It aims to increase its cash proportion closer to its peers by leveraging its strength in trade to cross-sell into cash management and become one of the top three players in transaction banking,” said CIMB.

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