Global lockdowns, relief measures weigh on Singapore banks

Singapore

SINGAPORE banks face uncertain times ahead as a combination of unprecedented global lockdowns and latest virus relief measures here and around the region put question marks over the full hit to their income and credit provisions for 2020.

The renewed questions come as the Monetary Authority of Singapore (MAS) on Tuesday outlined how financial institutions should allow distressed property owners and small- and medium-sized enterprises (SMEs) to defer principal repayments of qualifying mortgages and secured corporate loans through to the end of the year.

Checks by The Business Times showed that even if loan payments are deferred, they do not classify as bad debt. It is understood that given the circumstances of Covid-19 as an "event risk", the loans remain defined as coming from creditworthy customers facing temporary distress.

This classification is of interest as banks are expected to provide a cushion against bad debt, and that provisioning is deducted from earnings.

In a Morgan Stanley note on Wednesday seen by BT, UOB chief risk officer Chan Kok Seong was quoted as saying that Singapore banks are likely to assess the lifetime impairment of credits. "Credits that are temporarily affected by Covid-19 are unlikely to move between stages, and risk-weighted asset migration will depend upon whether or not weaker credit is viewed as temporary," said Mr Chan.

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Similarly, OCBC's head of global commercial banking Linus Goh told BT that OCBC is not expected to downgrade loans with repayments that have been deferred.

"The clients who are offered this are the ones who don't have a pre-existing weakness. Therefore, the understanding is that this is an event risk thrust upon all of us," said Mr Goh.

Still, Citi analyst Robert Kong said Singapore banks - held to more complex accounting standards now - will face their "first real test" on how to make forward-looking provisions for a broad macro downturn, and for large corporates that are not the direct target of these financial support measures but nonetheless may have run into financial difficulties.

The IFRS 9 accounting standard implemented at the start of 2018 is now used by banks to assess expected credit loss. This model requires banks to account for a prediction of economic cycles, and to hold their portfolio performance against that view.

Jefferies Research analyst Krishna Guha said that forecasting for banks has become difficult in trying to account for the support package alone.

Just looking at the consumer lending book here, at a worst-case scenario, Singapore banks may see a 14-18 per cent hit to their revenue in 2020, following the latest virus relief measures for consumers, he said.

Assuming the bank's entire mortgage and personal loan book is available for interest deferment or lower rates, Mr Guha sees a 14 per cent and 16 per cent hit on revenue for DBS and OCBC respectively on a worst-case basis, and a 18 per cent impact on revenue for UOB, the largest percentage given that the bank has the biggest on-and-off balance sheet exposure among the trio for small businesses at S$34 billion.

UOB's Mr Chan noted that the take-up of the bank's existing debt relief measures has been in the "low single digits". He expects a single-digit percentage of property owners, and up to 20 per cent of SMEs, to take advantage of MAS's moratorium guidelines.

Eric Tham, UOB head of group commercial banking, further told BT that "a significant number" of SME customers would likely tap these various relief measures to fulfil their "acute needs" at this time.

OCBC's Mr Goh said more SMEs across the board will look to apply for relief. Thus far, the bulk of relief requests from SMEs have been for the temporary bridging loans and enhanced working capital loans offered with Enterprise Singapore, through which the government assumes a significant portion of the risk behind such loans. These loans are structured to push out the repayment over the five years, to prevent a strain on cash flow even as things get better later, he said.

The remaining requests have been for moratoriums for principal repayments on secured and unsecured loans. The bank's most recent check with more than 6,500 of its SME customers showed nearly a third of them are keen to receive relief, he said.

A DBS spokesman told BT there has been a "healthy" take-up of its SME property loan moratorium and the extension of import facilities of up to 60 days.

CGS-CIMB analysts Lim Siew Khee and Andrea Choong said a prolonged virus situation could lead to higher provisions in the medium term, bearing in mind the escalating asset quality pressures given the extent of border closures, lockdowns, and social distancing measures.

Singapore aside, key markets for lenders here such as Malaysia have initiated lockdowns, while Indonesia has declared a state of emergency over the virus outbreak.

Earlier in March, UOB and OCBC extended their relief measures in Malaysia, including moratoriums, to their corporate and retail customers.

But banks with operations in Malaysia must now allow an automatic extension of credit facilities for SMEs from now to Sept 30, 2020, unless customers opt out or do not qualify, Bank Negara Malaysia announced just a week ago.

Malaysia makes up about 14 per cent of OCBC's core pre-tax profit and about 11 per cent of UOB's overall pre-tax profits in 2019. Indonesia is also a key market for the banks.

CGS-CIMB has for now estimated credit costs of 60 basis points (bps) across the lenders. In the event of a prolonged outbreak, credit costs of 70 to 80 bps could cause 2020 earnings per share (EPS) to fall by 27-42 per cent on a year-on-year basis, compared with CGS-CIMB's current estimate of a 22-31 per cent fall in EPS.

All three banks closed lower on Wednesday. DBS shares fell 42 Singapore cents to close at S$18.15, OCBC shares shed 15 cents to close at S$8.49, while shares of UOB were 36 cents lower at S$19.09.

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