SINGAPORE (May 15): In a recent press release by Accenture, a consultant suggested four key areas that demand banks attention: Credit management, revenue compression, customer service and operating models adjustment and innovation. These four areas are interesting because the three local banks are way ahead of the curve.

Credit management and customer service including supporting customers through a difficult period were perhaps the most obvious areas that the banks focused on during their 1QFY2020 business and financial updates. Conservative provisioning strategies and models caused earnings declines for all three banks. That is not to say that their topline fell. Quite the contrary: DBS Group Holdings reported a 13% q-o-q and 16% y-o-y rise in total income to $4.02 billion in 1QFY2020, while DBS’s income was boosted by non-interest in-come where trading income and gains from sale of investment securities rose 39% y-o-y.

“The big upside in the first quarter was from the non-interest income category. This is from three sources,” explains DBS CEO Piyush Gupta. “First, our customers have been a lot more active in risk management, both on the corporate and the consumer side, and that helped our sales activity. Second, the trading business has been able to do well in this volatile environment. Third, we have a sizable portfolio of investment securities and with the collapse in interest rates, a lot of those investments are in the money. We were able to monetise some of that, and that opportunity will continue to exist for the rest of the year.”

Oversea-Chinese Banking Corp (OCBC) announced a total income of $2.37 billion for its banking operations in 1Q2020, excluding insurance, up 7% y-o-y, but down 4% q-o-q. Great Eastern Holdings (GEH), OCBC’s insurance subsidiary, reported a doubling of its operating profit. However GEH’s net profit was dragged down by the mark-to-market effect of policyholders and shareholders’ funds, and this had a negative impact on OCBC’s net profit.

United Overseas Bank’s (UOB) total income in 1Q2020 was unchanged y-o-y at $4.07 billion, but down 1% q-o-q. Its net profit fell 19% y-o-y and 15% q-o-q to $855 million. Its earnings fell less than the other two banks because it started the quarter with allowances for non-impaired assets at around $2 billion but more of this later (see sidebar).

mute
In the first quarter, DBS’s net profit fell by 29% y-o-y and 23% q-o-q to $1.165 billion. OCBC’s banking net profit fell by 28% y-o-y and 32% q-o-q to $680 million. However its head-line figure of net profit was down 43% y-o-y to $698 million, impacted negatively by GEH.

Credit management

Accenture says for credit management, “as cash flows continue to tighten, banks can ex-pect an increase in loan defaults as borrowers struggle to make payments.” The consultant also adds that lenders will want to focus on the supporting government action, proactively initiate credit forbearance and modification programmes, prepare for losses with credit extension and credit upside. 

“The principal task of credit analytics should be to model the roll rate from stress to delin-quency, to resolution and recovery, and then target interventions that will keep those roll rates as low as possible and help as many customers as possible avoid default,” Accenture adds.

That also seems to be the intention of the local banks. “We do not enter into [government support programmes] with a target non-performing loan [in mind]. Every relief programme we’ve entered into is based on the assessment that the loan will be repaid and will not be non-performing,” says OCBC CEO Samuel Tsien.

Still, the local banks have raised their general allowances for non-impaired loans in 1Q2020. “Regardless of how effective both government and bank-sponsored credit modification and forbearance programmes prove to be, NPLs will undoubtedly rise in both the retail and commercial sectors,” Accenture cautions. Forbearance programs may push the NPL surge out for six months based on the Temporary Measures Act, but there will be many businesses and consumers who — even after that period — will not be able to make their next payment.  

OCBC announced that it expects to extend moratorium relief and government-assisted loans of $42 billion to over 165,000 individuals, SME and corporate customers across Singapore, Malaysia, Hong Kong, Macau and Indonesia. In Singapore, $4 billion of loan moratorium to individuals have been approved to date, mostly for home loans.

DBS said it is providing loan moratoriums for more than 1,800 corporate facilities representing more than $3.2 billion in loans outstanding and has made available $3.2 billion in loan facilities to local SMEs under the government’s relief programme. In addition, DBS has received requests to defer mortgage principal and/or interest payments of $4.7 billion. UOB announced a $3 billion liquidity re-lief programme, and has offered moratoriums on secured loans and mortgages.

Impact of forbearance measures

For the initial six month period of the Temporary Measures Act, consumers and SME customers who applied for relief and are not ser-vicing interest or principal, there will be less loan delinquency and NPL.

“After the loan moratoriums end, we ex-pect to see some of these loans turn bad. We estimate credit costs to be in the $3 billion to $5 billion range, which is between 80 and 130 basis points,” Gupta says.

OCBC has said that its overall cumulative credit costs over the next two years is estimated to be between 100-130bps, higher than the global financial crisis (GFC), close to SARS but lower than the Asian Financial Crisis (AFC).

“Going forward it is difficult to assume total credit costs. We have created additional provisions for non impaired assets. We have to continue to observe forward indicators like GDP growth, unemployment, interest rates and property prices and these are the major factors we take into consideration for Singapore and all the markets we are in,” Tsien says.

OCBC has estimated that NPLs could rise from 1.6% at end-March to as high as 3.5%. “All this depends on the effectiveness of the relief programmes. If the relief programme is effective and the economic impact of Covid is short term, and government measures to create new business activities are successful, we do not need to go to the higher end of this range. But in the event the relief measures are not effective, and activities cannot come up, [NPLs] could go to the higher end,” Tisen adds.

UOB’s management indicated that its cred-it costs are likely to rise to 50bps to 60bps a year for a two year period, which is around 100bps to 120 bps over two years, similar to guidance given by DBS and OCBC.

Revenue compression

“Retail and commercial banks will see short-term revenue compression from various sourc-es. Banks can focus on making payments safer by increasing limits on contactless cards and educating consumers on digital wallets,” Accenture suggests. Net interest margins are likely to come un-der downward pressure. Global central banks have their foot on the pedal, and policy rates have dived. The three-month Singapore Interbank Offered Rate (Sibor) which most mortgages are priced off, has fallen from 1.689% at end-Feb to 0.75% as at May 11. At any rate, loan growth is likely to be pretty flat this year, says Tsien.

If there is any growth it would emanate from North Asia where China is gradually going back to work after getting Covid-19 is under control. Further out, Tsien sees the Greater Bay Area and Southeast Asia as bright spots. “China has recovered earlier than most major economies and they have already created a lot of measures to increase domestic economic activities. After this event, people will reposition their supply chains and these will be close to where the demand is,” Tsien adds.

Clearly, China will be a huge source of demand because of its large domestic market and companies will continue to position themselves in China to tap its domestic market. Some companies may reposition their supply chains to Southeast Asia.

“I believe it Is the intention for overseas supplies to move their plants closer to where the demand is. China’s future demand will be fairly significant. Southeast Asia and GBA will be beneficiaries of those investments,” Tsien says. In addition, if the situation does not turn out as dire as the banks expect, they can always write-back some of their provisions and boost net profit. In 4QFY2019, DBS wrote back $83 million of general provisions.

UOB’s management said there was downward pressure on NIMs against a background of mid-single digit loan growth. Asset yields are falling, but so are funding costs, UOB’s management indicates.

“Loan pipeline remains healthy and we expect further drawdown of non-trade corporate loans in the next quarter,” Gupta says, sounding the most positive among the three banks.

Digitalisation

So far banking services have continued and customer service has not been compromised because of the circuit breaker. All three local banks have digitised their operations for consumers, SMEs and corporates. Almost everything can be done through the smartphone. OCBC points out that 2.4 times more SME accounts were opened digitally in 1Q2020 com-pared to 1Q2019, and 49% of SME loans were applied for digitally in 1Q2020 compared to 30% in 4Q2019. Corporates’ PayNow collec-tions also ballooned by seven times in 1Q2020 versus 1Q2019. UOB, too, has encouraged its customers to go digital. “We have seen our digital banking services such as UOB Mighty and UOB Busi-ness Internet Banking Plus become essential tools as more of our customers stay home to stay safe,” UOB CEO Wee Ee Cheong said in a statement.

“Banks should prioritise live interactions (enabled by video collaboration tools) with their

customers to help them with their financial future. At the same time, ramp up cybersecurity and anti-fraud tools,” Accenture suggests.

Estimates based on Bloomberg’s poll following the banks’ 1QFY2020 business updates show that net profit for all three banks are go-ing to fall this year, but could rebound modestly next year. As usual, analysts are most bullish about DBS, expecting its net profit to fall by 26.65% compared to the declines of OCBC and UOB (see table 1, below).