ASEAN banks brace for bad debt influx amid coronavirus devastation

SINGAPORE – Across the Association of Southeast Asian Nations, banks brace for a surge of non-performing loans as the coronavirus pandemic shakes business cash flows and creates difficulties in repaying debt debt.

Singapore-based Oversea-Chinese Banking Corp. said on Friday that its net profit for the first quarter ended March fell 43% year-on-year to S $ 698 million ($ 495 million), while ‘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 deteriorating economic conditions.

“We have closely monitored our credit portfolio in the face of market uncertainty and have significantly strengthened our allocations on a forward-looking basis,” said Samuel Tsien, CEO of the OCBC Group. While the bank’s NPL ratio has remained stable at 1.5%, the OCBC expects it to increase between 2.5% and 3.5% due to “weakness and weakness. short-term economic uncertainty “.

Credit rating agencies, including Moody’s, began in April to downgrade the outlook for the region’s banks, despite efforts by governments to roll out multibillion-dollar stimulus packages to save businesses.

“The economic and market upheavals caused by the epidemic will depress business activity and increase the risk to bank assets,” Moody’s said in a report released April 2.

“This is to deteriorate market sentiment about credit and recession risks,” said Wilson Teo, customer success manager for the Asia-Pacific region at financial market data provider Refinitiv. “Businesses will struggle as the coronavirus wreaks havoc on the economy. It makes interbank lending riskier, as banks tend to incur losses if companies go bankrupt.”

In its global economic outlook released in April, the International Monetary Fund forecast 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% in 2020. He had estimated in January an economic growth of 4.8% for these five countries.

Thailand’s four largest commercial banks – Bangkok Bank, Siam Commercial Bank, Krung Thai Bank and Kasikornbank, all of which have relatively higher NPLs of between 3.2% and 4.4% – will increase their provisions for prepare for bankruptcies caused by the Coronavirus pandemic.

As of March 31, the four banks have accumulated provisions with a total value of 87.6 billion baht ($ 2.7 billion), an increase of 24.3% compared to the end of 2019. Siam Commercial Bank recorded the largest increase with 52.7%, as it had the lowest amount. provisions at December 31.

“The COVID-19 pandemic is wreaking havoc among 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 income and asset quality, which will become evident in the coming quarters.”

Siam Commercial Bank is also canceling its 16 billion baht share buyback program, saying the move would give it the flexibility to seize potential business opportunities that may arise from the crisis.

Thai banks decided at the end of February to offer businesses affected by the coronavirus 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 Thailand’s central bank, said the industry has enough equity capital for a potential increase in bad debts and debt restructuring cases resulting from the coronavirus outbreak, according to local media.

Fitch Ratings, however, downgraded the outlook for Thai banks to “bbb” from “bbb +” and noted that as the duration of the pandemic remained uncertain, the impact on banks’ operations appeared to be “strongly negative”. The agency downgraded the default ratings of long-term issuers of Bangkok Bank, Kasikornbank, Siam Commercial Bank and Bank of Ayudhya.

“The performance indicators of the banking sector had already weakened in recent years due to gloomy economic conditions, low interest rates and competitive forces that have reduced growth in commission income,” said Fitch. “The coronavirus epidemic has dramatically increased these pressures. “

In Singapore, seen by many analysts as an indicator for the region, cracks have started to appear. Southeast Asia’s largest lender, DBS Group Holdings, reported first quarter net profit of SG $ 1.17 billion, down 29% from a year ago.

It set aside SG $ 703 million in additional general provisions for pandemic risks, bringing the total provisioned provisions by 29% to SG $ 3.23 billion. The bank is also exposed in terms of loans to struggling oil player Hin Leong Trading to the tune of $ 290 million.

Hin Leong collapsed as oil prices fell from drastically reduced demand as the pandemic shut down economies around the world. This has only made conditions worse in an already surplus commodities sector. This has prompted lenders to think more about lending to industry.

“We’re focusing more and more on the need to make sure that the documentation on trade finance … we’re much more disciplined about it and trying to make sure that due diligence on this is indeed enhanced,” said DBS chief executive Piyush Gupta. said in a results briefing on April 30.

Another Singaporean lender, United Overseas Bank, reported net profit of SG $ 855 million for the first quarter, 19% lower than the same period last year, and set aside SG $ 546 million. additional $ in reserves. OCBC said on Friday it had increased allocations with a room specially reserved for a “Singapore-based client company in the oil trading industry” to the tune of SG $ 275 million.

In Indonesia, Southeast Asia’s largest economy, the commodity shock was also felt. Moody’s criticized the negative outlook for the country’s banking system, noting that economic conditions will weaken demand for coal and palm oil, key export commodities for the country.

“The risks associated with commodity lending assets will increase as demand for commodities weakens,” Moody’s said. “Capital outflows will continue to put pressure on the rupee, hurting borrowers with unhedged dollar loans,” he added. But even as the risks increased, the agency also said Indonesian banks have sufficient buffer.

For Malaysia, Moody’s also issued a negative outlook on the country’s banking system, noting that asset risks for banks will increase as their profitability declines in a worsening economic environment. Fitch, meanwhile, also downgraded the rating of Malayan Banking (Maybank) and Hong Leong Bank in Malaysia.

While aggressive stimulus measures by ASEAN governments should provide some relief to banks as they face growing risks associated with bad loans, asset quality, falling rates and fears of recession remain concerns. dominant, Maybank Kim Eng analyst Thilan Wickramasinghe said in a report.

“Of course, not all stimulus is created the same way,” Wickramasinghe said. “We believe that markets with aggressive and early stimulus measures like Singapore, Malaysia, should fare better in terms of the outlook for non-performing loans compared to markets with limited responses like Thailand, Indonesia, Vietnam.”

Additional reporting by Masayuki Yuda in Bangkok.

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