• Rising defaults and ultra-low interest rates will be two major headwinds confronting banks next year, said Piyush Gupta, CEO of Singapore's largest bank DBS.
• Government support around the world has cushioned the pandemic's economic damage, but it has "masked the real size" of problems that companies and households face, Gupta said.
• An uptick in economic activity in the third quarter and a potential cooling in U.S.-China tensions could be "helpful" to banks, he added.

SINGAPORE — Global banks will be confronted by two major headwinds next year: rising defaults and ultra-low interest rates, said the chief executive of Singapore's largest bank DBS, Piyush Gupta.

Government support around the world has cushioned the pandemic's economic damage, but it has also "masked the real size" of problems that companies and households face, Gupta said on Monday. Such problems will come to fore when support measures are rolled back, he added.  

"So I do think we'll see a pick up in defaults and delinquencies around the world next year," Gupta told CNBC's "Squawk Box Asia" on the sidelines of the Singapore FinTech Festival.

That's not the first time that Gupta has warned about rising default rates globally. But he said DBS — like many banks globally — have in the past few months increased its reserves in anticipation of potential loan losses.

From January to September, DBS has set aside 2.49 billion Singapore dollars (around $1.87 billion) in total allowances — more than four times the amount in the same period a year ago, the bank said in its third-quarter earnings release last month.

"Now, whether the quantum of the reserve is adequate is anybody's guess. I'm quietly confident that we have done enough," he added.

'Helpful' developments

The CEO also said banks will continue to struggle with growing their lending margins, given that interest rates globally are expected to remain lower for a longer time. But an uptick in economic activity in the third quarter and a potential cooling in U.S.-China tensions could help to offset risks from lower rates, he added.

Gupta pointed out that activity in North Asian economies such as China, South Korea and Taiwan are almost back to pre-Covid levels.

"So as business activity resumes, that should be helpful," he said. "I think with the new U.S. administration, if the rhetoric between the U.S. and China cools off a bit, I think that will soothe the nerves of the market and that could be helpful as well."     

In the bank's home market of Singapore, Gupta said DBS can still grow its market share even as the banking landscape is set for a shake-up with the entry of four new digital banks. He added that revenues in Singapore have been growing at "high single-digit" levels.

DBS is an "integrated" bank with presence in nearly the entire banking value chain including payments, remittances, financial planning, corporate financing and investments, said Gupta.

"And therefore, I do think our capacity to continue to excel and grow in this market is very, very real," he said.