SINGAPORE (Apr 3): On Apr 1, the Monetary Authority of Singapore (MAS) said that the Temporary Measures Bill will provide needed temporary protection for SMEs, while being carefully scoped to avoid impairing the interests of banks and Singapore’s role in international financial transactions.
The proposed Bill covers only SME loans with specific security located in Singapore, namely commercial or industrial property in Singapore, or plant, machinery or fixed assets in the country that are used for business purposes.
As part of the package of relief measures announced by MAS on March 31, 2020, banks have already undertaken to defer principal payments on secured loans to SMEs until the end of the year, subject to assessment of the quality of the security. The proposed Bill pro-vides legal protection for the specific security and hence complements banks’ relief measures for SMEs.
DBS has launched a range of liquidity relief measures and other initiatives to help businesses, retail customers and communities impacted by the Covid-19 situation. These include home loan payment relief. To lighten SMEs’ cashflow burden during this period, DBS has pre-emptively rolled out a six-month principal repayment moratorium for SME property loans.
In addition to helping SMEs, the banks have rolled out additional measures for individuals where home-loan customers can apply to defer either their principal payment or both principal and interest.
Oversea-Chinese Banking Corp (OCBC) offers customers the option of an interest-only loan and deferring principal payment or deferring both principal and interest payments up to Dec 31, 2020. According to OCBC, individuals do not need to demonstrate any impact from Covid-19 to obtain the deferment.
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In addition, OCBC’s credit cards customers will have their minimum repayment reduced to 1% of their statement balance or $50, whichever is higher, for the next six months starting April 2020. OCBC’s credit card and personal loans customers can apply to convert their outstanding balances to term loans at a reduced rate of interest,capped at 8% for up to five years. This option is available to customers who have suffered a loss of 25% or more of their monthly income after Feb 1, 2020.
United Overseas Bank (UOB) had already rolled out a $3 billion package to help SMEs. Now, UOB is also offering an interest-only property loan for customers with residential or commercial property in Singapore for those employed in aviation, F&B, hospitality, retail, transportation and tourism.
MAS says the contractual rights of banks are not affected for the SME relief measures, other than the right to commence legal action for a default on a loan covered under the proposed Bill, which is put on hold during the prescribed six-month period. Banks’ contractual right to charge fees and interest for non-payment or late payment of loan obligations due is unaffected.
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“Apart from the secured SME loans specified above, the proposed Bill has no implications for banks on any of their other facilities, trans-actions, or contracts, or for Singapore’s role as an international financial centre,” MAS says.
How will temporary measures affect the banks?
“As interest is still accrued on the loan as well as the deferred principal amount, the impact on the net interest income will not be that material,” says Havard Chi, director of research at Quarz Capital Asia. “The reduced cash-flow stress due to the delayed principal payment, especially during this critical period, can increase the recoverability of the loan which will help the bank. It is essentially a win-win situation due to the extraordinary circumstances,” he explains.
Jonathan Koh, an analyst at UOB Kay Hian, says: “The assistance extended to homeowners and SMEs relates to loans secured by collaterals, whereby loss on default is expected to be lower. In particular, peak NPL ratios for residential mortgages ranged from 0.8% to 1.2% for the three local banks during the Global Financial Crisis.”
Moody’s Investors Service downgraded the local banks to a negative outlook from stable on April 2, due to potential problem loans and a deterioration of profitability. “Capital buffers will weaken, though modestly, as risk-weight-ed assets (RWAs) increase due to new problem loans,” Moody’s cautions.
Local banks’ profits will also be affected by rising credit costs. “Credit costs will rise as as-set quality worsens, while interest rates will decline due to monetary easing, weighing on net interest margins. Growth in wealth management income will also slow as new sales decline in highly volatile financial markets,” Moody’s says.
Using the GFC as a guide
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How high can credit costs go and how much could earnings fall? In FY2019, credit costs ranged from 18 basis points to 25 bps, and their non-performing loan ratios stood at around 1.5%. During UOB’s results briefing, its management indicated that credit costs in FY2008, during the Global Financial Crisis (GFC), rose to 80 bps. Its net profit fell by 8.2% y-o-y. OCBC’s credit cost was around 54bps in FY2008, and its net profit declined by 21% y-o-y.
In FY2018, credit cost for DBS was around 60bps and its net profit fell by 17%. In December 2008, DBS announced a rights issue to raise $4 billion.
Now though, Moody’s believes that liquidity will remain strong during the Covid-19 pan-demic, as will government support. “Given the banks’ systemic importance and the government’s fiscal strength and ample reserves, the government is highly likely to support the largest domestic banks when needed,” Moody’s says.
