Southeast Asian Banks Posting Losses, Bracing For Waves Of Bad Loans

Banks across Southeast Asia are wracking up losses and bracing for a wave of bad loans as the coronavirus pandemic paralyzes great swathes of the regional economy leading to a flood of bankruptcies and business closures.

Overseas-Chinese Banking Corp., or OCBC, of Singapore said on Friday that its net profit plunged by 43% in the first quarter on a year-over-year basis to $494 million, as it raised its total allowances by 165% due to its exposure to the oil and gas industry and to the worsening economy.

OCBC's nonperforming loan ratio remained at 1.5%, but the bank expects it to jump to between 2.5% to 3.5% on "near-term economic weakness and uncertainty."

"We paid close watch on our credit portfolio against the market uncertainty, and significantly shored up our allowances on a forward-looking basis," said Samuel Tsien, CEO of OCBC group, the second largest bank in southeast Asia. "As we enter this period of a health crisis that has developed into a global economic crisis, the conservative stance we have always taken to preserve a strong capital, liquidity and funding foundation have served our customers and shareholders well.”

But Tsien gave a grim assessment of the near term.

“Even if there is a stabilization by the end of this year, a strong recovery is unlikely until 2021,” he said.

Singapore-based DBS Group, Southeast Asia's largest bank, reported a 29% drop in first quarter net profit from a year ago. The lender has also set aside a total of $2.3 billion in general allowances for risks due to the pandemic.

Piyush Gupta, chief executive of DBS, warned that margins could “drop off quite sharply” in the second quarter by another 8 to 10 basis points.

“The biggest headwind we have obviously is the interest rate. The big cuts by the Fed [will] eventually trickle through and to our interest rate environment and that’s likely to produce the biggest headwind for us in the course of this year,” he said.

The bank also said that it has about $16.31 billion of outstanding loans in the troubled oil and gas sector.

DBS was reportedly heavily exposed (at an amount of about $290 million) to collapsing Singapore oil trader Hin Leong.

Gupta also predicted that Singapore’s economy may shrink by 6% this year.

“Because we’re an open economy, we get [hit] by slowdown in every parts of the world,” he said. “I think there’s broad scale of slowdown [in Singapore]. There are some pockets of growth but I think it will be late this year before you start seeing any turnaround.”

Another Singapore-based lender, United Overseas Bank, witnessed a 18.7% drop in first quarter net earnings, while setting aside an additional $386 million in reserve allowances.

Banks in Indonesia, Southeast Asia's largest economy, are also facing severe challenges.

Credit ratings agency Moody’s gave a negative outlook on the country's banking system due to its heavy dependence on commodities.

"Asset risks from commodity-related loans will increase as demand for commodities weakens," Moody's said. "Capital outflows will continue to pressure the rupiah [currency], hurting borrowers with unhedged dollar loans."

Bloomberg reported that Indonesian banks are prepared to add at least $36 billion of non-performing loans this year due to the Covid-19 pandemic.

“The hit to the banking sector is going to be pretty significant,” said Enrico Tanuwidjaja, an economist at PT Bank UOB Indonesia. “Even when demand for loans rebounds, we are unlikely to see it going back into double digits anytime soon. The banks will be quite careful in extending credit and post-pandemic industries will be evolving into new animals, making lenders become more cautious.”

Moody's also placed a negative outlook on Malaysia's banking system, while Fitch Ratings downgraded Malayan Banking (Maybank) and Hong Leong Bank.

Maybank Investment Bank Research expects Malaysian banks to see their earnings cut by 13% this year and by 15% next year due to slower loan growth, net interest margins compression, lower fee and investment income, and higher credit costs.

Maybank, the country’s largest lender, predicted the Malaysian economy will by shrink 3.3% this year due to coronavirus pandemic and lower crude oil prices.

“The year has turned out differently from our earlier expectations,” said group president and CEO Datuk Abdul Farid Alias. “Although the true impact of this virus on the real economy cannot be quantified at this juncture, we have seen financial markets swing violently...on severe sell-offs by investors.”

The four biggest commercial banks in Thailand -- Bangkok Bank, Siam Commercial Bank, Krung Thai Bank and Kasikornbank – which have unusually high nonperforming loan ratios of between 3.2% and 4.4% -- will increase loan loss provisions in order to prepare for a deluge of expected bankruptcies.

As of March 31, these four banks aggregated loan loss provisions of $2.7 billion, a 24.3% jump from the end of 2019.

"The COVID-19 pandemic is taking a toll on people and the private sector," said Arthid Nanthawithaya, chairman of the executive committee and CEO of Siam Commercial Bank. "It also poses significant challenges to the banking sector, both in terms of revenues and asset quality, which will become apparent in subsequent quarters."

In late February, Thai banks started to offer a year-long grace period on loan repayments to companies hammered by coronavirus, as well as to individuals who lost their jobs and have mortgages.

Don Nakornthab, senior director for the economic and policy department of the Thai central bank, the Bank of Thailand, said the banking sector has sufficient capital buffer for a potential avalanche of bad loans. But other analysts are pessimistic.

"The [Thai] banking sector's performance indicators had already been weakening over the past few years due to muted economic conditions, sustained low interest rates, and competitive forces that reduced growth in fee income," Fitch Ratings said. "The coronavirus outbreak has added considerably to these pressures."

Moody said it expects the operating environment for Thai banks to deteriorate in the next 12-18 months “due to disruptions from the coronavirus outbreak, and this will lead to a weakening of banks' asset quality and profitability.”

In early April, Moody’s started downgrading the outlook for banks in the whole Southeast Asian region.

"The economic and market upheaval caused by the [virus] outbreak will depress business activity and increase banks' asset risk," Moody's said.

"It boils down to deteriorating market sentiment about credit and recession risks," said Wilson Teo, customer success manager for the Asia-Pacific region at Refinitiv, a data provider. "Companies will struggle as the coronavirus takes its toll on the economy. That makes interbank lending [riskier] since banks tend to suffer losses if companies fail."

The International Monetary Fund recently warned that the five largest developing countries in region -- Indonesia, Thailand, Malaysia, Philippines and Vietnam -- would see their economies shrink by 0.6% in 2020. (Prior to the pandemic, in January, the IMF forecast 4.8% growth for those nations).

Thilan Wickramasinghe, an analyst at Maybank Kim Eng Securities, said stimulus measures by regional governments will help absorb some of Southeast Asian banks’ expected losses.

"Of course, not all stimulus measures are created the same," Wickramasinghe said. "We believe the markets with aggressive and early stimulus measures such as Singapore, Malaysia, should fare better in terms of nonperforming loan outlook versus markets with limited responses such as Thailand, Indonesia, Vietnam."