UOB debt workout teams to assess those on debt holiday

Singapore

UNITED Overseas Bank (UOB) has set up restructuring teams to assess borrowers who have taken a debt holiday amid the gradual unwinding of government relief measures as the year end approaches.

However, the bank does not expect a fallout of the Asian financial crisis magnitude as asset prices are unlikely to collapse given the extensive government income support not just in Singapore but also the rest of the world.

UOB posted a 40 per cent drop in second-quarter net profit to S$703 million for the three months ended June 30, hurt by weaker income and a surge in provisions set aside to brace for the easing of loan moratoria, UOB chief executive officer Wee Ee Cheong told analysts and media at a briefing on Thursday morning.

Net profit for the same period last year was S$1.17 billion. Its Q2 bottom line was weaker than the consensus forecast of S$815 million by four analysts in a Bloomberg poll.

Provisions against bad loans surged to S$396 million compared with just S$51 million a year ago, with credit costs rising to 67 basis points (bps). Total general provisions as at June 30 stood at S$2.39 billion, up 20 per cent from S$1.99 billion a quarter ago. The bank has guided for total provisions to remain at between S$2 and S$3 billion for "the next few quarters".

GET BT IN YOUR INBOX DAILY

Start and end each day with the latest news stories and analyses delivered straight to your inbox.

Sign UpVIEW ALL

At the virtual briefing, UOB group chief financial officer Lee Wai Fai said: "Various relief programmes and laws put in place now might result in low non-performing loans and low delinquency during this period. While we remain committed to supporting customers through difficult times, we are also expecting credit costs to rise when most moratoria end as not all customers can emerge out of this crisis the same."

Roughly 16 per cent of UOB's loan book is currently under moratorium programmes, with a "fairly balanced" split between individuals and businesses. About 10 per cent of loans in Singapore are under moratorium; in Malaysia and Thailand, the corresponding figures are 63 per cent and over 30 per cent respectively, due to automatic moratorium schemes in these countries. The bank said only a "small number" of customers are also taking additional relief in the form of subsidised financing.

The bank has projected that about 10-15 per cent of loans under moratoria may sour into bad debt in a worst-case scenario. For the remaining loans, the majority will probably require some restructuring, said UOB group chief risk officer Chan Kok Seong.

"There will be some restructuring required because we cannot expect all businesses to catch up with the clawback for deferment from day one. So those businesses that have a viable business model, we will look at them individually. . .look at their cash flow, their business model.

"If we believe they are viable, we will look at how to do a comprehensive commercial-based restructuring. If not, then we may have to exit that relationship a bit earlier," he said.

UOB is expecting the majority of non-performing loans (NPLs) to be realised only after loan moratoria expire. That said, the bank has been taking proactive steps to recognise high-risk debt earlier and has set aside ample provisions. "We are comfortable with our 60 bps credit cost estimate for the year," said Mr Lee.

UOB has further guided for cumulative credit costs of 100-130 bps through to FY2021. This is compared with a peak of 150 bps in just one year during the Asian financial crisis.

This comes as amid "significant" restructuring needed for some businesses, credit losses are expected to be spread out over two financial years, as credit accommodation across the region and globally has made a lot of difference for many businesses facing a liquidity crunch, said Mr Wee. "Asset prices are unlikely to collapse because of government support around the world. We don't expect the situation to play out like the Asian financial crisis. Many (businesses), with liquidity support, will survive."

While UOB is one the largest users of Enterprise Singapore's (ESG) risk-sharing loan facility to support the bank's small and medium-sized enterprise (SME) customers, Mr Wee said only 50 per cent of the ESG loans accepted by SME customers has been drawn down. This signals that their liquidity concerns are manageable.

The bank's SME book - which account for 15 per cent of its overall loan portfolio - is mostly made up of mid to larger SMEs, with turnovers of S$10 million to S$100 million in Singapore and Malaysia.

NPL ratio in Q2 stood at 1.6 per cent, up from a year ago's 1.5 per cent, and unchanged from a quarter ago. The bank has factored in a peak NPL ratio of 3-3.2 per cent.

UOB also bumped up its non-performing asset coverage ratio to 96 per cent, and unsecured NPA coverage ratio to 230 per cent.

Its regulatory loss allowance reserve (RLAR) set aside as at the second quarter also rose slightly to S$379 million. As at the end of the first quarter, UOB had pre-emptively raised RLAR above the minimum requirement to boost allowance coverage. RLAR is a separate reserve in equity - in other words, coming out from retained earnings - that can be used to reflect more coverage against non-performing assets. But it does not substitute for provisions deducted against income earned in each quarter.

The board declared an interim dividend of 39 cents per share, down from the year-ago quarter of 55 cents per share. The scrip dividend scheme will be applied with no discount. This move is in line with MAS' guidance for local banks to moderate their dividends for 2020.

UOB's total income in Q2 fell 12 per cent to S$2.26 billion, with both net interest income and fee income down due to falling benchmark rates and regional lockdowns.

Net interest margin (NIM) for the quarter stood at 1.48 per cent, a sharp fall from the 1.81 per cent earned on loans a year ago, and the 1.71 per cent earned on loans a quarter ago. The bank is expecting NIM to stabilise in the second half of 2020, trending up slightly by a few bps given that benchmark rates have hit an all-time low, said Mr Lee.

The one-month Sibor as at Wednesday stood at an all-time record low of 0.25 per cent; the three-month Sibor of 0.438 per cent was at a level not seen since 2014.

UOB's expenses for the second quarter fell 8 per cent from the year-ago period to S$1.04 billion. Return on equity stood at 7.1 per cent, sliding from 8.8 per cent in the first quarter, and down again from 12.5 per cent in the year-ago quarter.

CET1 ratio stood at 14 per cent, while loan growth slowed to 3 per cent year-on-year amid a focus on "high-quality loans".

UOB guided for mid single-digit loan growth and a "moderate rebound" in fee income for 2020 as economies gradually reopen. At best-case, the pandemic will be contained by end of this year and recovery will take place gradually, said Mr Wee. "As disruptive as they can be, crises come and go. In the meantime, we will continue to monitor our asset quality closely with robust stress testing to anticipate the worst-case scenario," he added.

The Monetary Authority of Singapore in July said its stress tests have shown that local banks are remaining resilient under adverse conditions on the back of the pandemic.

Shares of UOB closed trading at S$19.76 on Thursday, up 34 Singapore cents or 1.75 per cent.

READ MORE: