With reliefs yet to unwind, Singapore banks sit uneasy about final impact of Covid-19

To ready themselves for bad loans, the Big Three - all with dives in earnings - have frontloaded more provisions for Q2

Published Fri, Aug 7, 2020 · 09:50 PM

Singapore

SINGAPORE banks charted a sharp dive in earnings as benchmark rates collapsed in the second quarter and the trio lifted provisions as a buffer against defaults when loan moratoriums unwind at year's end.

Bank chiefs have warned that much of the next 12 months or so will hinge on a smooth exit from pandemic relief programmes, as well as how the pandemic-fuelled crisis unfolds. The Big Three stuck to their earlier guidance on net interest margins (NIMs) and credit costs from the first quarter, with asset quality looking under control - for now.

DBS chief Piyush Gupta flagged the difficulty banks face in estimating the hit taken to businesses, with much still up in the air as relief measures obscure the extent of damage.

"The reality is nobody really knows how much the moratorium is masking at this point in time, which is why I say we are watching it very closely because you only get a good sense of that (potential non-performing loans) when the moratoriums wind up," he told reporters.

Likewise, OCBC group chief executive officer (CEO) Samuel Tsien said on Friday that there is still "quite a bit of uncertainty" in the number of such loans that will turn bad.

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It will depend on how the companies' exit from moratoriums is managed, how fast markets can open up and whether economic activity can pick up, he said. It will also depend on how the pandemic unfolds.

There are silver linings. UOB CEO Wee Ee Cheong said just half of the risk-shared government loans accepted by small and medium-sized (SME) customers has been drawn down. This signals that their liquidity concerns are manageable, he said.

To add, asset prices are unlikely to collapse, given the extensive government income support around the world, he said.

DBS noted that just under 5 per cent of its loans are on debt holiday, with about S$12.5 billion of its SME loan portfolio split mostly equally between Singapore and Hong Kong, and mostly backed by property.

On the consumer side, about S$5.7 billion of its loans are on moratorium; most are Singapore mortgages for properties which are owner-occupied and with low loan-to-value (LTV) limits. These low LTVs and strong collateralisation, again, offer some comfort.

OCBC, which closed the results season on Friday, said 10 per cent of its loan book are under moratoriums; 88 per cent of them are fully secured - offering "comfort" that repayments will be made, said Mr Tsien. The bank estimates gross non-performing loan (NPL) ratio to peak between 2.5 per cent and 3.5 per cent, in its worst-case scenario of a "disorderly" exit from loan-relief programmes.

Over at UOB, 16 per cent of the loan book is under moratorium and other relief schemes, with about 10 per cent in Singapore, 63 per cent in Malaysia and over 30 per cent in Thailand. It projects that 10 per cent to 15 per cent of such loans will sour in the worst case, with the majority of the rest potentially to be restructured.

UOB has already set up restructuring teams to assess borrowers who have taken a debt holiday.

DBS' Mr Gupta said the banking industry is working with the regulator to mitigate the risks of a "cliff effect", a risk that emerges if the plug is pulled on loan reliefs at one go, leaving customers collectively unable to service their debts.

Analysts said DBS has shown strength in having a lower percentage of loans under moratorium. Maybank Kim Eng analyst Thilan Wickramasinghe said that this points to lower stress among DBS' customers.

"The strength of the group's franchise is that it is predominantly exposed to large corporates and multi-national corporations. These are better equipped to ride out the Covid-19 volatility," he said.

"Also, a third of its loans are in North Asia, where growth is returning, as a result of the easing of lockdowns."

To ready themselves for the emergence of bad loans, the banks have all frontloaded more provisions in the second quarter.

DBS' non-performing asset (NPA) coverage ratio now stands at 106 per cent - the highest among the trio. OCBC has an NPA coverage ratio of 101 per cent, up from 78 per cent a year ago; UOB has bumped up its NPA coverage ratio to 96 per cent.

OCBC and UOB calculate NPA allowance coverage by including what they have set aside under regulatory loss allowance reserve (RLAR), a separate reserve in equity. Stripping out RLAR, OCBC's NPA coverage ratio ex-RLAR would be 81 per cent; that for UOB would be 88 per cent.

DBS has not set aside RLAR in this period. To be clear, its total general provisions of S$3.8 billion exceeds the regulator's requirement by 24 per cent.

OCBC also wrote down S$350 million in the carrying value of the existing offshore support vessels that back corresponding impaired loans, amid a dim outlook of the sector.

As the banks continue to build buffers in the second quarter, the Big Three have kept to their earlier guidance from the first quarter as NPL ratios remained steady.

DBS still expects credit costs of 80 to 130 basis points (bps) over two years. OCBC still maintains credit cost estimates of 100-130 bps.

UOB - which last guided for 60bps of credit costs this year - has further guided for cumulative credit costs of 100-130 bps through to FY2021.

Citi analyst Robert Kong noted that UOB's provisions of about S$700 million in the first half of 2020 means that it is "likely to continue to feel the credit cost pressure" through to 2021, and that it "lags peers in getting ahead of the asset quality curve".

Meanwhile, DBS and OCBC are expecting interest income to go down on further pressure from NIM, while UOB believes that it bottomed out in the second quarter.

DBS is expecting full-year NIM to come in at 1.6 per cent, while OCBC guided for NIM to maintain at the "high 1.5 per cent" range for the second half of 2020. UOB, on the other hand, is expecting an upside to NIM, projecting it to trend up "slightly" by a few bps in the second half. Its NIM for the quarter was 1.48 per cent, down from 1.71 per cent a quarter ago.

The three banks have already seen the impact of the Fed cut rates flow through their loan books in the second quarter, which hit their earnings hard with potentially more pain to come.

DBS' net profit fell 22 per cent to S$1.25 billion from a year ago, while OCBC and UOB's net profit both dived 40 per cent to S$730 million and S$703 million respectively.

The non-interest income (NII) for DBS and OCBC rose 11 per cent over the year, buoyed by trading and investment gains. UOB had no such lift, with NII declining 14 per cent.

But all in, the banks expect a moderate rebound in fees as economies gradually reopen, with wealth management having already troughed in April. Cards and bancassurance activities are also expected to pick up.

With the Monetary Authority of Singapore calling on banks to cap their FY2020 dividends per share at 60 per cent of 2019's levels, the banks all lowered their dividends and applied scrip schemes.

DBS, which pays dividends every quarter, declared a dividend of 18 Singapore cents per share, down from 30 cents per share paid out a year ago.

UOB proposed an interim dividend of 39 cents per share, down from the year-ago quarter of 55 cents per share. OCBC declared an interim dividend of 15.9 cents per share for the half-year, compared with the dividend of 25 cents per share declared in the year-ago period. It sweetened the deal by offering scrip dividend scheme at a 10 per cent discount.

The three banks ended trading mixed on Friday. DBS rose 20 cents to end at S$20.60, OCBC fell 8 cents to close at S$8.72, while UOB declined 18 cents to end at S$19.58.

READ MORE: OCBC swallows bitter pill on offshore sector

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