Singapore banks in spotlight over upcoming Q1 provisions, dividends

Singapore

THE scale of bad loan provisions and how the dour economic environment will impact dividends will be closely watched by analysts in the upcoming results of Singapore's banks - the first quarter that will reflect the early impact of a global pandemic.

As it is, the Big Three - DBS, OCBC and UOB - are likely to see higher provisions on the back of their oil and gas (O&G) exposure and as businesses take a harder hit with the deepening recession, said analysts.

Earnings are widely expected to come down for the trio, with the potential for dividends to be cut to conserve capital, they added.

For the three banks, Jefferies' equity analyst Krishna Guha expects a 38 per cent year on year decline in earnings for the first quarter.

Citi analyst Robert Kong projects DBS' profit to fall 19 per cent; OCBC, 22 per cent; and UOB, 19 per cent. This dive in earnings comes partly from falling net interest margins (NIMs) on the back of Fed rate cuts in March.

He added that loan volume is likely supported by larger companies drawing down on committed lines, and banks providing short-term US-dollar liquidity lines in March.

DBS analyst Lim Rui Wen has estimated that every 10 basis-point (bps) drop in NIM has a 6 to 8 per cent impact on net profit.

With the Fed having slashed rates in March, the three-month Singapore inter-bank offered rate (Sibor) - which tracks the Fed funds rate - has also fallen sharply in response. It hovered around 1 per cent by the end of March, falling from 1.77 per cent at the start of the year.

"We expect Q1 2020 NIM to drop by a greater magnitude than Q4 2019 primarily due to loans being repriced at lower average rates," wrote Ms Lim.

The upcoming quarters will see "sharper declines" due to the lag effect in re-pricing of loans, with banks' profits expected to decline across Singapore banks by 13 to 18 per cent throughout FY20, she told BT.

Higher credit costs will also weigh on earnings, said analysts. Banks are expected to provide a cushion against bad debt, and that provisioning is deducted from income. Banks guided for just 25-30 bps of credit costs for 2020 back in February, though UOB later upped its base-case credit cost scenario to 50-60 bps, Citi said. This is higher than the norm, but still "far short of past recession peaks" which were 100 bps in the global financial crisis and up to 200 bps in the Asian financial crisis, wrote Mr Kong.

CGS-CIMB analyst Andrea Choong expects credit costs of 55 bps for DBS, 71 bps for OCBC and 47 bps for UOB, on the back of "chunky" O&G-specific provisions and given the demand shock caused by Covid-19.

One key guidance from the Monetary Authority of Singapore (MAS) has been that banks do not have to lump loans under various moratoriums and relief measures as non-performing loans (NPLs).

DBS' Ms Lim expects higher general provisions as macroeconomic variables change on weaker outlook across economies due to the pandemic. "Actual specific provisions at a later stage, after the moratorium ends, will likely boil down to judgment on individual borrowers' profile," she said. Some considerations include whether certain businesses are likely to be performing post-Covid or if there are structural changes in the business or industry.

Given that the MAS has said that fiscal measures need to be taken into account on top of the various macro economic variables to determine general reserves, guidance by the banks at the upcoming results will be crucial to determine the level of credit cost and how it builds up through the year, said Jefferies' Mr Guha.

Maybank Kim Eng analyst Thilan Wickramasinghe further said that while overall provisioning will be higher over the quarter, the full impact to provisions from the escalation of Covid-19 may come later.

"A clearer picture will have to wait till Q2 where we will see the effects of the circuit breaker as well as the unprecedented government support schemes that were launched."

The banks' exposure to the O&G sector is also likely to come to light in Q1, with analysts expecting to see an increase in NPLs and credit charges given the volatility in the O&G sector, with Hin Leong the most high-profile casualty of the plunging oil prices.

It was reported that the Singapore banks have a total exposure to Hin Leong at about US$600 million.

OCBC had said its O&G exposure makes up about 5 per cent of customer loans, while UOB said theirs was under 4 per cent. DBS declined to give a figure.

Citi's Mr Kong estimates a full write-off of the banks' reported exposures to Hin Leong, with the impact magnified if taken in one quarter of earnings.

Phillip Securities research analyst Tay Wee Kuang expects allowances from Q2 onwards, with an impact on the local lenders' earnings of between 4 to 7 per cent. "The extent of the impact on the banks' earnings will be contingent on the allowances already set aside in the aftermath of the 2016- 2017 oil price meltdown," he said.

With earnings to dip from lower NIMs and higher credit costs, dividends are likely to be reduced accordingly. Mr Guha said that while banks have the capital buffers to maintain dividends even if profits fall 40 per cent, shareholders also must share in the pain of the downturn.

"In these times, it is more about purpose before profits and demonstrating equitable sharing the pains among all stakeholders," he said.

A recent commentary by DBS CEO Piyush Gupta "moulds the expectation" that banks are considering calibrating their dividend policy, said Mr Guha. In an opinion piece on April 20, the DBS chief said: "Governments are pitching in, taxpayers are pitching in, banks are pitching in, shareholders have got to pitch in. As responsible members of the community, there are no two ways about it."

Mr Wickramasinghe pointed out that there is "pressure from regulators globally to cancel dividends as a mode for preserving capital". But he noted that Singapore banks have strong capital and balance sheet liquidity and lower gearing levels compared with banks in most other developed economies.

The Big Three all have common equity-tier one (CET1) ratios of above 14 per cent - far higher than Singapore's regulatory minimum of 9 per cent that includes the capital conservation buffer. Singapore's regulatory minimum for the CET1 ratio is also higher than that of Basel III.

The CET1 ratio is a signal of banks' capital strength, and measures lenders' core equity capital against their risk-weighted assets.

"We believe there is relatively less pressure for the banks to adjust earlier dividend payout guidance at this stage," said Mr Wickramasinghe.

On April 7, MAS eased capital requirements to boost lending activities, but did not restrict their dividend policies. Elsewhere, banks such as HSBC and Standard Chartered have cancelled dividends after pressure from the Bank of England.

DBS pays dividend quarterly, while OCBC and UOB pays semi-annual dividends. In Q4, DBS has said that barring unforeseen circumstances, the annualised payout will go up to S$1.32. UOB had said it would keep to a 50 per cent dividend payout ratio for FY19. OCBC has avoided a dividend payout ratio policy, but its proposed 2019 payout ratio was 47 per cent.

With all three Singapore banks releasing abridged results for the first time, analysts say that they look forward to qualitative comments around asset quality and dividends.

Mr Wickramasinghe said analysts will be looking closely for guidance on provisioning outlook, stress testing, balance sheet liquidity as well as the impact of deploying government assistance programmes.

DBS is due to report its Q1 results on April 30, UOB will report its set of numbers on May 6, and OCBC close off the Q1 reporting season for the banks on May 8.