“While asset quality remained healthy, given an uneven path for global economic recovery ahead, we remain cautious of the potential impact on our portfolio. We continue to leverage technology to tackle financial crime risk and strengthen our cyber security defence.”
Tan Teck Long
Chief Risk Officer
Top and emerging risks
The Board and senior management drive a robust process to identify and monitor our top and emerging risks. This year, Covid-19 unexpectedly ranked top of the list, and we took steps to manage the credit, liquidity, and operational risks arising from it. In addition to the pandemic, we focused our attention on (i) Environmental, social and governance (ESG) risks, (ii) Financial crime risk, (iii) Data governance risk and (iv) Cyber security and data protection.
Credit risk and portfolio management
In 2020, we saw economic growth stalling unexpectedly with the outbreak of Covid-19. The resulting lockdowns in multiple countries caused supply chain disruption and global demand contraction.
We conducted extensive thematic portfolio reviews on the impact of the global pandemic. Our initial portfolio reviews were geographically focused, covering Greater China and Singapore. As the pandemic quickly spread across the world, the subsequent reviews adopted an industry focus, which included highly impacted industries such as oil and gas, aviation, hotels, retail, food and beverage. From the various reviews conducted, our overall portfolio was assessed to be resilient with relevant risk mitigation strategies in place.
The nature of our exposure to the oil and gas segment has changed in recent years and the bulk of our current exposure is to investment- grade producers and processors, comprising mainly oil majors and state-owned companies. In addition, we have scaled back and been disciplined with our oil traders’ exposure over the years. However, we recognised a major non-performing loan during the first quarter of the year. Our portfolio is generally assessed to be stable. Lately, the oil price has recovered to above USD 50 per barrel, which is higher than our stress testing assumption.
The majority of our aviation portfolio is to national ﬂag carriers, global aircraft leasing companies as well as leasing companies affiliated to large banks. While the credit quality of our aviation portfolio remains satisfactory, we will continue to monitor the portfolio closely, which is dependent on the containment of the Covid-19 situation and resumption of travel.
Due to volatile commodity prices and heightened fraud risk, key industry players came together to establish a code of best practices for commodity financing. The code was announced by the Association of Banks in Singapore (ABS) in November 2020. DBS remains active in trade finance, and we view the establishment of the code as a major positive development to support the financing of commodity players.
Overall, our corporate and institutional banking portfolio is diversified across industry and business segments, with approximately 75% to investment-grade borrowers.
The small and medium-sized enterprise (SME) segment is expected to be more vulnerable during the downturn. Most of our SME exposure is in Singapore and Hong Kong, and is predominantly secured against properties with prudent loan-to-value (LTV). Our growth in loans to the SMEs in 2020 is mainly attributed to relief loans to the Singapore SMEs which are 90% secured by the Singapore government.
Our residential mortgages are also primarily in Singapore and Hong Kong. The majority of our exposure is for owner occupation. Overall, our housing mortgages are mostly well secured with relatively low LTVs. Unsecured consumer credit loans constitute less than 2% of the bank’s total loan exposure. With unemployment likely to rise, we expect some deterioration in our portfolio, but overall credit quality should remain healthy.
We continue to watch the macroeconomic developments closely as the global pandemic situation evolves.
The mainland China economy has rebounded after the steep contraction during the first quarter of the year. The Covid-19 situation also appears to be under control in Singapore, Hong Kong and Taiwan. Our exposure to these locations constitutes more than 80% of our total corporate and institutional banking portfolio, and we have been proactive in managing our risk. In Indonesia and India, our portfolios comprise largely lending to large corporates, and remain resilient amid the Covid-19 environment. Nevertheless, given that the pandemic still affects the European and US markets, and coupled with resurgence risk, the global economic activity is not expected to return to pre-pandemic levels in the near term. Tensions between the US and China as well as the de-coupling of the supply chain across the world are also likely to persist.
Given the ongoing macroeconomic challenges, we will continue to exercise prudence in our client selection and credit underwriting criteria, as well as closely monitor our portfolio.
We continue to enhance our credit underwriting capabilities leveraging traditional and non-traditional data sources, and through ecosystem partnerships. In 2020, we experimented with new credit underwriting models for the Singapore SME segment. We also furthered our collaboration with ecosystem partners in markets such as India, Indonesia, and China to enable lending to the underserved consumer segment.
We continued our multi-year credit architecture programme (CAP) journey which includes putting in place a robust credit risk data infrastructure and workﬂow management system, underpinned by modern technology architecture to support our Institutional Banking Group (IBG). By the end of 2020, we had launched the core modules of CAP in most of our locations. In addition, the Credit E-Memo, a key module of CAP, was one of the 12 winners among 40 finalists in the Monetary Authority of Singapore (MAS) FinTech Awards 2020. The award is a testament to our goals towards reimagining credit.
Managing liquidity risks during increased market volatility due to Covid-19
With the outbreak of Covid-19 globally, the US dollar wholesale funding market froze in March 2020. As a precautionary measure, we took early action to increase customer deposits to further strengthen our funding liquidity profile. Subsequently, from April 2020, central banks’ actions to assure wholesale market liquidity led to a more benign funding environment. Our liquidity profile remains well-diversified with multiple avenues to access further wholesale funding and customer deposits whenever necessary.
Managing operational risks amidst Covid-19 disruptions
When remote working arrangements were activated during the pandemic, we developed new processes or revised existing processes to ensure that the bank’s operations were not disrupted. Key operational risks were identified, assessed and mitigated or residual risks accepted according to the established governance process. In addition, we worked with our material outsourced service providers to ensure service delivery was not adversely impacted.
The experience and learnings from managing operational risks during the pandemic accelerated our digital transformation and enhanced controls in the digital solutions offered to our customers and employees. We also successfully mitigated the cyber security and data protection risks associated with remote working (Refer to “Cyber security and data protection”).
Environmental, social and governance (ESG) risks incorporated into credit risk management and sustainable finance
In 2020, we added a new ESG sector guide for the apparel, footwear and textile industry.
With the issuance of the Environmental Risk Management Guidelines for Financial Institutions by the MAS, we spearheaded the development of a handbook, which forms the basis for industry-wide training to build capacity and capability.
In July 2020, we launched the Sustainable and Transition Finance Framework and Taxonomy, to guide our business originations and advisory efforts in this area. We concluded 50 transactions covering sustainability-linked loans, renewable financing and other green loans, amounting to SGD 9.6 billion.
Read more about “Responsible financing” in the Sustainability Report.
Financial crime risk
Leveraging technology and data analytics, substantial progress was made to enhance our systems to further mitigate financial crime risk. Over the years, we heightened our risk surveillance at various levels. We used artificial intelligence at the transaction level, dynamic analytical reviews at the customer level, and macro analysis of fund flows at the country level. We also continued to focus on public-private sector collaboration, developing a platform for risk information sharing between financial institutions and law enforcement agencies.
Data governance risk
We recognise that responsible practices around data governance are key for customer and stakeholder trust. We continue to develop our data governance framework along three prisms. Firstly, a baseline prism encompassing data lineage, data quality, and legal and regulatory compliance. Secondly, an ethical prism – PURE (Purposeful, Unsurprising, Respectful and Explainable) – for the responsible use of data. And thirdly, a model governance covering regulated and artificial intelligence models and their performance over time.
Cyber security and data protection
As the bank adopts work from home measures, we expedited the implementation of our cyber security initiatives to mitigate potential incremental security threats from possible security risk exposures. We reinforced and scaled up the internal environment to ensure the network is secured and healthy for staff working remotely. Cyber security subject matter experts were further engaged to validate our control environment and key processes to provide assurance on our cyber security programme and controls. Along with our digital transformation, we continue to invest in innovative security controls. We also believe that people are integral to overall cyber defence and further enhanced our staff security awareness through training.
Tan Teck Long
Chief Risk Officer
DBS Group Holdings
2021 Focus Areas
Further refine and streamline end-to-end credit processes across all markets
Enhance our existing credit underwriting capabilities
Mitigate financial crime risk
Further deepen our credit and portfolio management capabilities
Continue to strengthen our multi-layered cyber security defence