Tue, Feb 25, 2020 – 5:50 AM
SINGAPORE banks have guided on the size of provisions that can cover the impact from the Covid-19 outbreak ahead, but analysts say the lenders may have to stomach more if the disruption to supply chains and consumer demand extends beyond the first half of this year.
Banks' guidance on the buffer set aside for souring loans is much lower than that of past crises. "The wildcard lies in the credit cost impact," said CGS-CIMB in a report.
The Sars (severe acute respiratory syndrome) outbreak in 2003 and the global financial crisis in 2009 saw credit costs – provisions as a percentage of total loans – peak at above 60 bps.
In a report on Monday, Citi analyst Robert Kong said the banks' overall expected credit cost uptick of five bps due to Covid-19 "may be met with scepticism from investors".
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He said the virus impact on gross domestic product is "worse than initially assessed", adding that China may see a first-quarter growth of just 3.6 per cent while the Hong Kong economy may remain in recession, with domestic banks there already seeing spikes in credit cost for the financial year ended Dec 31, 2019 (FY19).
Hong Kong and China are Singapore banks' key growth engines in the region, driving 10 to 26 per cent of 2019 group profit before tax, and 15 to 30 per cent of loans in FY19.
OCBC and UOB have guided credit cost to rise to about 25 to 30 basis points (bps), while DBS has flagged a potential 4 to 5 bps increase.
DBS Research has estimated that every five bps uptick in credit costs would impact sector earnings by about 3 per cent.
To be clear, Singapore banks' modest credit cost guidances largely assume that the Covid-19 outbreak will last till mid-2020, said Mr Kong. This is similar to the Sars outbreak in 2003, which lasted about a quarter.
UOB chief financial officer Lee Wai Fai said the bank's credit costs could jump to 80 bps if the outbreak drags beyond mid-2020, though he said this is "highly unlikely" given the various relief measures in place.
For DBS, most of its corporate customers in the "vulnerable" sectors are "more resilient", and include large businesses. OCBC's chief Samuel Tsien said the better credit quality now amid "prudent portfolio actions" last year could cushion credit costs due to Covid-19.
But analysts flagged concerns should the impact of the virus outbreak push beyond mid-2020. The second-order impact would become more entrenched, leading to "far higher" credit costs, said Mr Kong.
While credit costs are expected to tick higher in FY20 – single-digit impact for now – due to Covid-19, the banks have earlier built general cushion for the macro slowdown in Hong Kong and the US-China trade war. This would offer some buffer, noted CGS-CIMB analysts Andrea Choong and Lim Siew Khee.
There is also broad confidence that the recently unveiled relief measures by banks and the Singapore government are sufficient to alleviate cash flow pressures faced by affected corporates, analysts suggested.
"The general provisions undertaken by banks should be sufficient, in the context that the outbreak should be contained within two to three months," Phillip Securities analyst Tay Wee Kuang told BT.
DBS chief Piyush Gupta said the bank's general provisions (GP) in FY19 has been "very robust", as it had earlier set aside a cushion for ongoing macro issues. "With a little bit of luck, I don't think we'll see an impact on the cost of credit flowing through the P&L (profit and loss statement) because of the GP," said Mr Gupta at a results briefing earlier this month.
For OCBC, the projected absence of sizeable oil and gas provisions – which accounted for about two-thirds of total FY19 provisions – in FY20 should "keep headline credit costs relatively stable", said CGS-CIMB's Ms Choong and Ms Lim.
But in view of a prolonged virus outbreak, Maybank Kim Eng analyst Thilan Wickramasinghe guided credit cost of 20 to 34 bps for OCBC between FY20 and FY22. OCBC's allowances for credit losses in FY2019 were "significantly higher than our already bearish assumptions", said Mr Wickramasinghe in a broker's note. Though this mostly came from the bank's legacy oil-and-gas exRead More – Source