The coronavirus pandemic-induced economic pain may be worse than predicted, said the CEO of DBS Piyush Gupta on Monday (20 July), adding that banks potentially face “far more damage” to their balance sheets when the Government relief measures are rolled back.
In an interview with CNBC today, Mr Piyush explained many countries have rolled out relief measures to help businesses tide through the economic crisis, whereby banks like DBS would play a role to ensure that companies have enough liquidity to keep them going in the short term.
“The real problem is going to be the long term, because many of these companies will find that it’s not a liquidity problem, it’s eventually a solvency problem,” the DBS CEO noted.
Many companies may not survive when the relief measures have ended, he said, in which the Government will then have to figure out how to deal with these “zombie companies”.
“Do you keep putting money using public finances to support companies? Or do you let creative destruction happen a la Schumpeter?” Mr Piyush stated, while referring to economist Joseph Schumpeter’s concept of creative destruction.
He foresees a “real challenge” particularly among the small and medium-sized enterprises (SMEs) around the world, indicating that politics and civil society might cause difficulties to Governments in supporting the businesses financially for long periods.
“That means you’ll start seeing a lot more default, which in turn means that you’ll start seeing the problems spill over to the financial sector,” Mr Piyush stated.
Despite noting that banks could have “far more damage” to their balance sheets, he opined banks in globally can take on “a lot more pain” compared to the global financial crisis in the past decades.
Mr Piyush hinted that DBS had taken “some fairly draconian assumptions around the number of SMEs that are likely to be unable to survive” in its internal stress testing. He also warned that the ratio of bad loans could be worse than the level recorded in the global financial crisis.
“I think you will see more stress on the financial system in the later part of this year and next year without a doubt. And that’s just because the fallout of the macroeconomic shock has still to filter through the financial system at this point in time, I think it will come,” he said.
Aside from the ratio of bad loans, another challenge for banks would be a low interest rate environment.
“In Hong Kong and Singapore, interest rates are down to historic low. Certainly for us in DBS, for most banks, a zero interest rate environment means we’ll start facing extraordinary headwinds from an income standpoint,” he elaborated.
While Mr Piyush implied that he’s open to potentially cutting dividends, he said DBS has enough capital base to “not have to go there” yet.
“If we voluntarily cut dividend, I think it’ll be a fair bet to say that we think the outlook is grimmer than we had originally anticipated,” he added.
Singapore’s economy contracted by 41.2 per cent in the second quarter from the previous three months, according to advance estimates by the Ministry of Trade and Industry (MTI) on 14 July, in which the contraction was inflicted by the country’s circuit breaker measures against the coronavirus pandemic.
The Minister for Trade and Industry Chan Chun Sing said on 15 July that Singapore’s greatest economic uncertainty comes from the global external demand for its goods and services, in which additional Government stimulus may not be the best solution to it.
“The greatest uncertainty and the downside risks at this point in time is the global external demand, and I don’t think fiscal measures alone will be the most appropriate for this kind of challenge,” he remarked.
The Government has put aside 20 per cent of its GDP fiscal stimulus to help affected businesses and households, and prevent a surge in retrenchment. In fact, more than 140,000 employers will be receiving the Jobs Support Scheme (JSS) payouts which totalling over S$4 billion from 29 July.