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SINGAPORE – Across the Association of Southeast Asian Nations, banks prepare for a wave of delinquent loans as the coronavirus pandemic shakes business cash flows and creates difficulties in paying down debt.
Singapore-based Oversea-Chinese Banking Corp. said on Friday that its net profit for the first quarter ending in March fell 43% yoy to 698 million Singapore dollars ($ 495 million) as it increased its total allocations. 165% to SG $ 657 million from SG $ 249 million a year earlier due to exposure to oil and gas and worsening economic conditions.
“We were attentive to our loan portfolio in the face of market uncertainty, and we significantly underpinned our future expectations,” said OCBC group CEO Samuel Tsien. While the bank’s non-performing loan ratio remained stable at 1.5%, OCBC expected it to rise between 2.5% and 3.5% due to “short-term economic weakness and uncertainty.”
Credit rating agencies, including Moody’s, began to downgrade the region’s banks in April, despite efforts by governments to implement stimulus packages worth billions of dollars to save businesses.
“The economic and market turmoil caused by the outbreak will depress commercial activity and increase the risk to banks’ assets,” Moody’s said in a report released April 2.
“It comes down to worsening market sentiment on credit and recession risks,” said Wilson Teo, client success manager for the Asia-Pacific region at financial market data provider Refinitiv. “Businesses will fight as the coronavirus affects the economy. That makes interbank lending more risky as banks tend to suffer losses if firms fail.”
In its global economic outlook released in April, the International Monetary Fund projected that the five largest developing economies among the 10 countries of the Association of Southeast Asian Nations (Indonesia, Thailand, Malaysia, the Philippines, and Vietnam) would contract by 0.6 % 2020. An economic growth of 4.8% had been estimated in January for these five countries.
Thailand’s four largest commercial banks: Bangkok Bank, Siam Commercial Bank, Krung Thai Bank and Kasikornbank, which have a relatively higher delinquency rate of between 3.2% and 4.4%, will increase provisions to prepare for bankruptcies caused by the coronavirus pandemic.
As of March 31, the four banks accumulated provisions totaling 87.6 billion baht ($ 2.7 billion), an increase of 24.3% since the end of 2019. Siam Commercial Bank recorded the largest increase with 52.7%, since it had the lowest amount of provisions as of December 31.
“The COVID-19 pandemic is affecting people and the private sector,” said Arthid Nanthawithaya, chairman of the executive committee and CEO of Siam Commercial Bank. “It also poses significant challenges for the banking sector, both in terms of revenue and asset quality, which will become apparent in subsequent quarters.”
Siam Commercial Bank is also canceling its 16 billion baht share buyback program, saying the decision would give it flexibility to take advantage of potential business opportunities that may arise from the crisis.
Thai banks decided in late February to offer coronavirus-affected companies a one-year grace period for loan repayments. People who are laid off and have mortgages are also eligible for the same grace period.
Don Nakornthab, senior director of the economic and policy department at the Thai central bank, said the sector had enough capital buffers for a possible bad debt surge and debt restructuring cases stemming from the coronavirus outbreak, according to the media. local.
However, Fitch Ratings downgraded Thai banks ‘outlook from “bbb +” to “bbb”, noting that since the duration of the pandemic remained unclear, the impact on the banks’ businesses appeared “very negative” . The agency downgraded the long-term issuer default ratings of Bangkok Bank, Kasikornbank, Siam Commercial Bank and Bank of Ayudhya.
“Banking sector performance indicators have already weakened in recent years due to muted economic conditions, sustained low interest rates and competitive forces that slowed growth in fee income,” Fitch said. “The coronavirus outbreak has greatly increased these pressures.”
In Singapore, seen by many analysts as a benchmark for the region, the cracks have begun to show. South East Asia’s largest lender, DBS Group Holdings, posted a net profit of SG $ 1.17 billion in the first quarter, a 29% drop from the previous year.
It set aside another SG $ 703 million in general provisions for risks derived from the pandemic, increasing the total reserves reserved by 29% to SG $ 3.23 billion. The bank is also exposed in terms of loans to the conflicting oil player Hin Leong Trading in the amount of $ 290 million.
Hin Leong doubled when oil prices collapsed due to a drastic reduction in demand as the pandemic closed economies around the world. That only served to worsen conditions in an already oversupplied commodity sector. It made lenders think more about lending to the industry.
“We are focusing much more on making sure that the documentation on trade finance … we are being more disciplined around that and trying to make sure that due diligence around that is stricter,” the chief executive said. from DBS Piyush Gupta. he said at a results briefing on April 30.
Another Singapore lender, United Overseas Bank, has reported net earnings of SG $ 855 million for the first quarter, down 19% from the same period last year, and has reserved an additional reserve of SG $ 546 million. OCBC said on Friday that it increased allocations with space specifically for a “Singapore-based corporate client in the oil trade sector” to the tune of SG $ 275 million.
In Indonesia, the largest economy in Southeast Asia, the impact on commodities has also been felt. Moody’s imposed a negative outlook on the country’s banking system, noting that economic conditions will weaken demand for coal and palm oil, key export products for the country.
“Commodity-related loan asset risks will increase as demand for commodities weakens,” Moody’s said. “Capital outflows will continue to pressure the rupee, hurting borrowers with unsecured dollar loans,” he added. But even as the risks increased, the agency also said that Indonesian banks have enough cushioning.
For Malaysia, Moody’s also raised a negative outlook on the country’s banking system, noting that asset risks for banks will increase as their profitability declines amid worsening economic conditions. Fitch, meanwhile, also issued rebates to Malaysian Malaysian Banking (Maybank) and Hong Leong Bank.
While aggressive stimulus measures by ASEAN governments should bring some relief to banks as they face increasing risks associated with bad loans, asset quality, falling rates, and fears of recession remain concerns. dominants, Thilan Wickramasinghe, analyst at Maybank Kim Eng, said in a report.
“Of course, not all stimulus measures are created in the same way,” said Wickramasinghe. “We believe that markets with aggressive and early stimulus measures, such as Singapore, Malaysia, should perform better in terms of prospects for delinquent loans versus markets with limited responses such as Thailand, Indonesia, Vietnam.”
Additional reports from Masayuki Yuda in Bangkok.
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