The economic consequences of the coronavirus pandemic are likely to worsen when authorities begin to reverse aid measures, and banks could experience “much more damage” to their balance sheets, said Piyush Gupta, executive director of the Singaporean bank DBS group.
Speaking to Christine Tan, CNBC presenter “Managing Asia,” Gupta said government stimulus in many countries is helping companies get through the current difficult period. But when those measures come to an end, many companies may not survive, she explained.
“If many companies cannot survive … you will have this million dollar question on how to deal with these ‘zombie companies’,” said the CEO.
“Are you still putting money … using public finances to support companies or are you letting creative destruction happen to the Schumpeter? This is going to be a real challenge, particularly in the SME space around the world, I suspect that It will be a great, great challenge next year, “he added.
Gupta was referring to a concept popularized by the Austrian economist Joseph Schumpeter, which describes the process of dismantling the old to make way for the new and the improved.
The CEO said that politics and civil society would make it difficult for governments to continue financially supporting those companies for long periods. That “means that it will begin to see many more defaults, which in turn means that it will begin to see how the problems spread to the financial sector,” he explained.
For banks, there would be “much more damage” to their balance sheets, Gupta said. But banks globally have also entered the current pandemic-induced crisis with a stronger foundation and can take on “much more pain” compared to the global financial crisis of more than a decade ago, he added.
More ‘stress’ in the financial system
In Singapore, where DBS is based, the government has projected an economic contraction of between 4% and 7% this year, which would be the country’s worst recession since independence in 1965.
Authorities have introduced measures to help households and businesses, including allowing them to defer some of their loan payments until the end of this year.
The financial regulator and the city-state central bank, the Singapore Monetary Authority, said last week that nearly 34,000 mortgages now enjoy deferred principal or interest payments or both. He added that more than 5,300 small and medium-sized businesses have deferred payments on guaranteed loans.
Ravi Menon, managing director of MAS, said the aid measures “will help us overcome the worst part of the crisis,” but that they cannot continue forever. He explained that the accumulation of debt could increase the risk of default “later”.
Gupta said DBS, the largest bank in Southeast Asia, has taken “some pretty draconian assumptions about the number of SMEs that are unlikely to survive” in its internal stress tests. He warned that the proportion of bad loans could be worse than the level seen during the global financial crisis.
“I think they will undoubtedly see more stress on the financial system in the latter part of this year and next. And that’s only because the consequences of the macroeconomic shock have yet to seep through the financial system right now, I think it will come.” , said.
That, coupled with a low interest rate environment, exacerbates the challenges facing banks. But the CEO reiterated that the bank has strengthened its reserves in anticipation of possible credit losses. While open to potentially cutting dividends, he said DBS has a strong enough capital base that it “doesn’t have to go there” yet.
“If we voluntarily cut dividends, I think it would be a fair bet to say that we think the outlook is bleaker than we originally anticipated,” added Gupta.
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