SINGAPORE (April 13): Concerns are emerging that the local banks may need to bear the burden of bad debts and non-performing loans, as they go all out to support the economy amid the Covid-19 outbreak. The raft of support measures an-nounced in the Unity, Resilience and Solidarity Budgets, focuses on helping SMEs retain jobs and maintain cash flow.
Some of the measures announced by the Monetary Authority of Singapore and Singapore banks include helping individuals and SMEs meet their loan and insurance commitments; provide SMEs with continued access to bank credit and insurance cover; and ensuring interbank fund-ing markets remain liquid and well-functioning.
In addition, a Temporary Measures Bill was passed to suspend for six months contractual obligations across five broad categories: lease for non-residential property; construction and supply contracts; event contracts; tourism-related contracts; and payment of secured loans from banks for SMEs.
On April 7, MAS also clarified that the total debt servicing ratio (TDSR), a property market cooling tool, will not apply to deferment of mort-gage repayments for residential, commercial, or industrial properties; refinancing of owner-oc-cupied residential mortgages; mortgage equity withdrawal loans if the loan-to-value (LTV) ratio does not exceed 50%; and unsecured credit facilities such as credit cards and personal loans. MAS will also allow banks to relax their capital and liquidity requirements so that they can sustain their lending activities.
“We believe these measures are more of a supportive signal for the sector to keep liquidity flowing, while also providing some clarity to the markets in terms of credit charges,” says Maybank Kim Eng analyst Thilan Wickramasinghe.
In addition to the stimulus packages, policy interest rates are falling. Singapore’s exchange rate policy and the easing for the SGD NEER leading to a weaker Singapore dollar may limit the decline in local rates. But the US$60 billion ($85.4 billion) swap agreement between the MAS and the Federal Reserve may keep US dollar liquidity ample and as a result, curb up-ward pressure on interest rates from a weaker Singapore dollar. No surprise then, that local banks are anticipating downward pressure on their net interest margins (NIMs), but this may turn out to be the least of their problems.
Expected credit loss
During the six-month period of government measures, banks may receive no interest payment for certain loans, but interest will still ac-crue to banks’ profit and loss accounts. This means net interest income (NII) could continue to reflect interest payment, when there is none. During this period, because of the temporary measures bill, banks may not need to make allowances for this non-payment.
“Financial institutions should assess a borrower’s risk of default comprehensively, tak-ing into account the mitigating effects of the relief measures, and the borrower’s ability to make full repayment based on the revised loan terms as well as its creditworthiness in the long term,” MAS says. In this event, there may not be much impact on banks’ credit costs during the next six months.
“Credit costs will go up, but also as a result of extensive forbearance measures (stimulus) reported credit costs might be pretty low,” says Eugene Tarzimanov, vice-president and senior credit officer of financial institutions group for Moody’s Investors Service, on April 7. Credit costs are likely to double, from the 25-30 bps to 60 bps, he adds.
“The bank could have risk of reversal of the accrued interest after the six-month period, and that could lead to an impact on the profit and loss statement later,” Tarzimanov cautions.
During the Global Financial Crisis, credit costs were higher than current levels. Oversea-Chinese Banking Corp’s credit costs were at 54bps in FY2008 while DBS Group Holdings credit costs were at 60 bps. On the oth-er hand, United Overseas Bank’s credit costs for FY2008 were at 47 bps but credit costs for 4QFY2008 were at 75bps.
Thus far, banks have been very supportive of the government measures. Darren Tan, group CFO of OCBC, tells The Edge Singapore on April 7 that since the outbreak, the bank has worked in closely with the government, to provide ap-propriate and timely assistance via the expansive range of government measures introduced, to tide its customers over this trying period.
Not considered as restructured loans
In normal circumstances, restructured loans are likely to be assessed as non-performing. However, based on the stimulus package and accompanying temporary measures bill, payments are waived for six months.
Even then, Tarzimanov expects non-performing loans to rise about 50 basis points this year for all three banks to 2% from 1.5% in FY2019.
Dividends, not buybacks
Regulators in the UK and Europe have discouraged banks from paying dividends because capital has to be retained to support lending in the economy. JP Morgan Chase, the largest US bank, is considering the suspension of its dividend – if so, it will be its first ever.
MAS says sustaining lending activities should take priority over discretionary distributions. While there is no need to restrict the dividend policies of banks, the release of capital buffers should not be used to finance share buybacks during this period, says MAS, in a nodded reference to the active share buybacks by the banks since the outbreak started.
“We conduct share buyback in the open market to use the acquired shares to meet the deferred long-term compensation of our employees. This is a long-term incentive plan to reward, retain and align our employees to the longer-term growth of our bank,” Tan of OCBC explains.
“Correspondingly, we approach our buy-back of shares on a long-term, systematic basis whereby we preclude ourselves from tim-ing our purchases, but instead purchase small quantities of shares at regular intervals. “This way, we do not disrupt the market dynamics in its discovery of the clearing price of our shares,” he elaborates.
A UOB spokeswoman says UOB ceased share buyback activities on March 26. “The share buyback activities were for the purpose of granting restricted shares as part of our incentive compensation programme for employees,” she adds.
In an April 7 report, UBS says Singapore banks are better capitalised than their UK counterparts. While their risk weighted assets (RWA) density is higher than UK banks, the CET1 ratio of local banks is 102 bps higher than what their management is comfortable with, and 535 bps above regulatory requirements in Singapore (see table).
On the other hand, the CET1 ratio of UK banks is only 39 bps above their management’s comfort level and 375 bps above regulatory requirements. In addition, Singapore banks pre-provisioning operating profit is 11 times higher than pro-visions, compared to eight times higher for UK banks, and five times higher during the GFC.
Whatever the case, with liquidity headwinds posed by loan moratoriums, that cutting dividends temporarily might be preferred over negative cash flow, UBS suggests. “OCBC appears to have a higher threshold versus peers, given their more conservative stance the last couple of years. We expect 4–5% cut at DBS, and the special dividend of 20 cents to be cut at UOB this year,” says UBS.
Another aspect of dividends is that local banks could offer scrip dividends instead of just cash. All three banks have a scrip dividend programme. Tan reassures investors that OCBC will continue to pay dividends. “We reward our shareholders with a progressive dividend that grows in tandem with our long-term growth. As we have built up a strong capital position over the years, we are confident that we would be able to maintain our dividend policy of paying progressive and sustainable dividends,” he says
