SINGAPORE (April 28): HSBC Holdings reported a 48% y-o-y decline in profit before tax to US$3.2 billion from higher expected credit losses (ECL), other credit impairment charges and lower revenue. The reduction primarily reflected the global impact of the Covid-19 outbreak and weakening oil prices, the banking behemoth said. Profit after tax was down 49% y-o-y to US$2.5 billion.

Reported ECL increased by US$2.4 billion to US$3.0 billion due to the impact of Covid-19 and weakening oil prices on the forward economic outlook and a significant charge related to a corporate exposure in Singapore. HSBC’s exposure to Hin Leong Trading, which is under court protection, is US$600 million. Allowance for ECL increased from US$9.2bn at Dec 31 2019 to US$11.1 billion at Mar 31 2020. 

As a result, credit costs for the quarter to Mar 31 2020 rose to 118 basis points from 28 bps in the quarter to Dec 31, 2019, and from 24 bps in 1QFY2019.

The banking group explained that an immediate financial impact of the outbreak is an increase in ECL, driven by a change in the economic scenarios used to calculate ECL. The outbreak has led to a weakening in GDP globally, and in the markets that HSBC is present in, including Hong Kong, Singapore and Europe. ECL macroeconomic models are a key input used for calculating ECL, and the probability of a more adverse economic scenario for at least the short term is substantially higher than at Dec 31.

HSBC explained that ECL will arise from other parts of its business impacted by the disruption to supply chains with heightened risk to the oil and gas, transport and discretionary consumer sectors.

Common equity tier 1 capital (CET1) ratio of 14.6% (4QFY19: 14.7%), included the impact of the cancellation of the final dividend in respect of 2019. “We also expect mid-to-high single digit percentage growth in risk-weighted assets (RWAs) in 2020, including as a result of the effects of negative credit rating migration movements, impacting our CET1 ratio,” HSBC said. RWA is the denominator of the CET1 ratio.

DBS Group Holdings reports its 1QFY2020 earnings on Apr 30. In 4QFY2019, DBS reported net profit of $1.508 billion. Analysts are expecting a decline to $1.138 billion fpr the three months to Mar 31 2020, according to Bloomberg. DBS had the largest exposure to Hin Leong among the Singapore banks, of US$290 million. For the quarter to Dec 31, DBS’ credit costs for specific allowances was 21 bps and its CET1 ratio was 14.1%.