Citi at ease with Singapore banks' provisions amid relief extension

CITI analysts remain "comfortable" with Singapore banks' credit cost forecasts even as debt relief for certain individuals and small businesses will be extended into 2021.

"We concede that this could serve to further push back the full recognition of peak non-performing loans (NPLs) into late 2021 and hence add to investor uncertainty," said Citi analyst Robert Kong in a report on Tuesday, referring to the impact from the latest debt extension relief. "But we remain comfortable with our 2020/2021 cumulative provisions assumptions."

Citi said from discussions with banks, the local lenders expect about 10 to 15 per cent of vulnerable loans booked by the trio lapsing into new bad loans. This comes as vulnerable loans averaged 9.7 per cent according to data from June this year, below his team's projection of 12.2 per cent, Mr Kong said.

The bulk of this "positive surprise", he wrote, comes from DBS, which saw 5 per cent of the group's loans under moratorium as at the middle of this year - a "far lower" proportion than Citi's assumption of 10.8 per cent.

This is likely because geographically speaking, the group's focuses on Singapore and Hong Kong, and has relatively limited exposure to the Asean region outside Singapore. In terms of customer segments, it tends to bank top-tier corporates and property owner-occupants with mortgages, Mr Kong said.

But he pointed out that OCBC and UOB's proportions of vulnerable loans could be overstated due to both banks' geographical exposure to Malaysia.

Mr Kong said DBS looks best placed to be in the lower half of its provisions guidance of S$3 billion to S$5 billion over two years. Citi also views the bank as having the earnings capacity to front-load more provisions into 2020, allowing for a strong return on equity recovery at the end of next year.

The key wildcard for South-east Asia's largest lender, he said, is if a lumpy corporate loan becomes non-performing, and where its exposure is unsecured or the collateral significantly deteriorates in value.

"The banks learned such lessons during the 2016 oil support services asset quality cycle and other past corporate-related NPL cycles where collateral cover was weak," he said.

As as June 2020, S$12.6 billion of DBS's S$18.3 billion loans under moratorium were corporate loans, most of which were secured. The remaining S$5.7 billion were consumer loans, mostly owner-occupied local housing loans of which loan-to-value were well below regulatory thresholds.

For OCBC, the 10 per cent of loans under moratorium as of June 2020 is broadly in line with earlier assumptions, Mr Kong wrote. However, this figure could be overstated because of the group's exposure to Malaysia - which the analyst considers OCBC's "key wildcard".

Taking Malaysia out of the equation, the percentage of Singapore loans under moratorium comes to less than 7 per cent, he noted.

OCBC expects cumulative credit costs to be between 100 to 130 basis points over 2020 and 2021, translating to between S$2.7 billion to S$3.5 billion in provisions.

As for UOB, Mr Kong noted that the bank has thus far lagged peers in terms of front-loading provisions, which could suggest more a subdued upside to recovery at the end of next year. The proportion of loans under moratorium stands at 16 per cent, above Citi's initial projection of 12 per cent - but the analyst pointed out that this could, as with OCBC, be due to exposure to Malaysia.

Considering Singapore alone, the proportion of loans under moratorium for UOB still comes up higher than its peers, to about 10 per cent, perhaps because the bank has a relatively higher loan bias towards small- and medium-sized enterprises (SMEs).

Apart from exposure to Malaysia, property market values might be another key wildcard for UOB, Mr Kong wrote.

High loan collateral coverage helps mitigate loss given default risk, and the percentage requiring major restructuring or lapsing into bad loans may be lower than expected due to relief schemes for SMEs, low interest rates and now the extension of debt moratorium into 2021, he said.

UOB expects cumulative credit costs to be between 100 to 130 basis points over 2020 and 2021, translating to between S$2.8 billion to S$3.6 billion in provisions.