The concurrence of recent relief measures and unprecedented lockdowns worldwide and regionally have led to uncertain times for Singapore banks as their credit and income provisions take a toll in 2020.
The questions arose again for consideration as the Monetary Authority of Singapore (MAS) proposed measures on Tuesday (1 April) regarding how financial institutions should let distressed SMEs and property owners defer the principal repayments of secured corporate loans and qualifying mortgages until the end of this year.
According to The Business Times (BT), deferred loan payments are not classified as bad debt. This is because, the creditworthiness of customers facing temporary difficulties amid the “event risk” of COVID-19 is circumstantial. This classification is important because banks are expected to mitigate against bad debt while also deducting provisioning from earnings.
BT and UOB Chief Risk Officer Chan Kok Seong remarked after reading a note by Morgan Stanley on Wednesday (1 April) that banks in the country focus on assessing 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.”
Linus Goh, who is OCBC’s Head of Global Commercial Banking, spoke to BT that loans with repayments that have been deferred will not be downgraded by the bank.
Mr Goh added: “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.”
Singapore banks that adhere to more complex accounting standards, will experience their “first real test” on how to make forward-looking provisions to prepare for a broad macro slowdown as well as for large corporates which are the indirect target of these financial support measures may have experienced financial distress.
In the beginning of 2018, the IFRS 9 accounting standard was introduced which banks now adopt to assess expected credit loss. With the new standard, portfolio performance must be assessed by accounting for economic cycle prediction.
Accounting for the support package alone through forecasting for banks is proving to be difficult, as mentioned by Krishna Guha, an analyst of Jefferies Research.
Based on the consumer lending book, Mr Guha added that the worst-case scenario will see Singapore banks losing 14 to 18 per cent of revenue this year amid the recent pandemic relief measures for consumers.
He opined that revenue loss would be 14 to 16 per cent for OCBC and DBS as a worst-case scenario, provided that the bank’s entire mortgage and personal loan book is available for interest deferments or cheaper rates. As for UOB, revenue loss would be 18 per cent because the bank has the largest on-and-off balance sheet exposure for small firms at S$34 billion, compared to OCBC and DBS.
The adoption of the bank’s existing debt relief measures is now in the “low single digits”, Mr Chan explained. With MAS’ moratorium guidelines in place, he expects a single-digit percentage of property owners and as much as 20 per cent of SMEs to take advantage of the guidelines.
Speaking to BT, the UOB Head of Group Commercial Banking, Eric Tham remarked that “a significant number” of SME customers would likely take advantage of these relief measures to meet their “acute needs” right now.
More SMEs from many sectors will be applying for the relief, Mr Goh said. So far, enhanced working capital loans and temporary bridging loans offered with Enterprise Singapore make up most of the relief requests by SMEs. The government shoulders a large portion of the risk of these loans. With the loans, repayment will be extended over five years so that cash flow strain can be minimized as recovery happens, he added.
Moratoriums for principal repayments on secured and unsecured loans form the remaining relief requests. From latest check with more than 6,500 of its SME clients, almost a third are looking forward to benefit from the relief, Mr Goh elaborated.
There has also been a “healthy” adoption of its extension of import facilities of up to 60 days and its SME property loan moratorium, according to a DBS spokesman who told BT.
A persistent pandemic situation could cause higher provisions in the medium-run, considering the escalating asset quality pressures fuelled by the extent of social distancing, border closures and lockdown measures, CGS-CIMB analysts Lim Siew Khee and Andrea Choong opined.
Besides Singapore, key markets such as Indonesia have announced a state of emergency over the pandemic whereas Malaysia has implemented lockdown.
Last month, relief measures in Malaysia including moratoriums have been extended by UOB and OCBC to their retail and corporate customers.
According to Malaysian central bank last week, Bank Negara Malaysia, unless customers do not qualify or opt out, banks operating in Malaysia must allow an automatic extension of credit facilities for SMEs from now until 30 September 2020.
In 2019, Malaysia formed around 11 per cent of UOB’s overall pre-tax profits and approximately 14 per cent of OCBC’s core pre-tax profit. Another key market for the banks is Indonesia.
The credit costs across the lenders have been estimated at 60 basis points (bps) by CGS-CIMB. Credit costs of 70 to 80 bps could crimp 2020 earnings per share (EPS) by 27 to 42 per cent on a year-on-year basis, as opposed to the current estimate of 22 to 31 per cent decline in EPS.
On Wednesday (1 April) all three banks closed lower with UOB shares S$0.36 lower at S$19.09, OCBC shares S$0.15 lower at S$8.49 and DBS shares S$0.42 lower at S$18.15.