SINGAPORE (July 21): DBS Group CEO Piyush Gupta says the global outbreak is the “single biggest crisis” he has seen, because it is a “very human crisis”. In terms of impact, Gupta says the world has not seen anything like “the height of dimensions of this crisis… from an economic standpoint”.
“At the macro-economic level, I think this is going to have more far reaching consequences than anything since the 1930s,” he tells CNBC’s Christine Tan in a July 17 interview.
While the full impact of Covid-19 has yet to be felt among the financial markets due to stimuli from central banks, Gupta feels that the effects will come belatedly.
“So, to that extent, this is not as severe in the short term, but overall, I would have to say this is the biggest crisis that mankind has faced in the last 70 years,” he says.
The impact of Covid-19 on small and medium-sized businesses
On the impact the pandemic has made on small and medium-sized businesses, Gupta says DBS’s focus has been to ensure that the companies have enough liquidity to tide them through the short term. This is done through programmes to provide a moratorium on principal repayments in tandem with government support.
However, this is not sustainable. In the long-term, many of the companies will eventually face solvency problems, instead of simply liquidity issues.
“If a lot of companies are not able to survive, then when you get to later in this year or even next year, you'll have this million-dollar question of: how do you deal with these ‘zombie companies’? Do you keep putting money and letting using public finances to support companies or do less creative destruction happen ala Schumpeter,” he asks.
“This is going to be a real challenge, particularly in the SME space around the world. I suspect this would be a big, big challenge next year,” he says.
On the global recovery
Now that we are three, four months into the crisis, Gupta says it is difficult to place an accurate estimate on how long recovery will take among global economies.
It could be anything – from V-shaped to L-shaped, U-shaped, or W-shaped – due to the uncertainty of the virus, which makes it difficult to figure out how quickly that recovery will kick in, he says.
“I suspect that things will be worse than people predict. Therefore, in our own stress testing, we have taken some fairly draconian assumptions around the number of SMEs that are likely to be unable to survive, if not surface well,” he adds.
When asked for a number, Gupta cited his previous quarterly guidance for DBS, that the scale and scope of the credit problems between 2020 and 2021 could range within $3 billion to $5 billion, as compared to $1 billion for a typical year.
“What I'm saying is that I could see challenges that are two to three times that I would normally see. But I have to tell you, this is not scientific and we're going to learn a lot more as we go along,” he stresses.
A further downturn in the overall banking sector
The overall banking sector, including NPLs, provisions, and defaults around the world could get worse than levels last seen in 2009, says Gupta.
While there seems to be a sharp rebound in many markets, Gupta suspects that it is from the effect of comparing numbers from April and May, that “anything from that looks better”.
The way he sees it, Gupta foresees that a recovery within the global markets is going to “take time”, and be “long drawn” – a “U-shaped recovery if you’re lucky”.
“If unemployment hits what people predict - 200,000 jobless, and if GDP and PMI are as negative as we expect, I think it's going to create a much bigger extent of damage than people are currently positing. So, I think it could be worse than 2008, 2009,” he warns.
Gupta says that the banking sector is approaching the current crisis “much stronger” compared to the global financial crisis (GFC) in 2008 and 2009 partly due to the regularly reform agenda that helped banks have much more capital.
In DBS’s case, Gupta says the bank has built up a lot of reserves, with some $3 billion available in general reserves. In 1Q20, DBS took an additional $700 million dollars to “build up buffers ahead of time”.
“I think the biggest and most significant thing that's happened for us is actually not just the slowdown in the economies that obviously matters, but the consequent actions taken by the central banks, which has effectively driven interest rates down to zero in most parts of the world,” he says citing examples of unprecedented cuts by the Fed, and historical lows in interest rates in Hong Kong, and Singapore.
The revenue impact on DBS, Gupta adds, would be more than 2%.
“We've said before during guidance that interest rate impact on DBS is roughly easy to estimate - that over a couple of years - 2-3 years, every basis point drop in interest rate costs us almost $12-15 million in income. So, if rates are down by 100 basis points, then that's when over a billion dollars of income loss to us over two, three years,” he adds.
Recovery timeline
When asked on how long he feels the recovery could take, Gupta says the world may have to wait till 2021, which will start benefitting from a low base year in 2020, as he does not see any y-o-y recovery this year.
While he feels domestic sectors of the economy will start recovering because of the gradual opening up within most countries, cross-border sectors – travel, tourism, hospitality, and airlines – may not return to pre-Covid levels for an extended period of time.
While the loosening of monetary policies and other central bank initiatives to cushion the immediate blow of the Covid-19 crisis is “good”, Gupta feels that the consequences will have to be felt within the financial system “sooner or later”.
“One of the challenges it creates is the challenge of moral hazard. The challenge of moral hazard, as I said before, is we have taken care of individuals and companies, whether they are deserving to be taken care of or not, whether they really have a business model which is robust and resilient for the long term,” he says.
“When you start doing that, you create a situation of heads I win, tails you lose... Now, no country can afford to perpetuate moral hazard into the future. Therefore, when you get to a second round, politics will make it difficult, civil society will make it difficult... So, I do think you'll start seeing a lot more selective support next year, which means that you'll start seeing a lot more defaults, which in turn means that you'll start seeing the problems spill-over to the financial sector,” he adds.
