Three banking risks in the time of Covid-19


WHEN bankers fret about contagion, it’s usually the financial kind. DBS Group Holdings Ltd is battling a different outbreak.

The full-year results of Singapore’s largest lender are pre-Covid-19. Still, they offer clues to what investors in banks with pan-Asian heft — including HSBC Holdings plc, Standard Chartered plc and Citigroup Inc — should be watching.

A day before its earnings report yesterday, DBS Group had to evacuate an entire floor of 300 people in its headquarters after one employee tested positive for the virus. Stressful as such situations are, big organisations like DBS Group have protocols to preserve business continuity. The bank, which now does a growing chunk of its business online, ought to be able to supply banking services reasonably efficiently.

The main concern is whether the epidemic, which has hit its key markets of Singapore, Hong Kong and China, will sap demand for financial intermediation. Things were looking tough even before the virus, though DBS Group ended the year with record earnings of S$6.39 billion (RM19.1 billion), a 14% increase. Loans grew 4% last year, slowing from 7% in 2018.

The Singapore mortgage business lost momentum after the government surprised the market in July 2018 by introducing measures to curb price gains.

Net interest margin peaked at 1.91% in the first half before stumbling to 1.86% in December, as the US Federal Reserve (Fed) stopped raising interest rates and started cutting.

That’s a less favourable stage than the 2003 SARS epidemic, when DBS Group had better margins than now.

If the top headache for trade finance in 2019 was the US-China spat, supply chain disruptions would be this year’s migraine. Assuming the outbreak is under control by summer, DBS Group foresees a 1% to 2% hit to annual revenue.

But, what if the public health scare lasts longer and spreads wider? Add the risk that the Fed may be forced to cut interest rates further to deal with the fallout from the disease, and the outlook for loan pricing is dimmer than two months ago.

Singapore is expected to vigorously prime its fiscal pumps next Tuesday to support virus-hit businesses, such as hospitality and retail. With local infections climbing, DBS Group should assume that the first half of 2020 (1H20) may be a washout in its home market.

What’s more relevant is whether there will be a sharp recovery, which is what happened after SARS. After dropping 13% in the first half, net profit for 2003 tapered to a smaller 7% fall. It almost doubled the following year.

DBS Group had to face SARS when its balance sheet hadn’t fully healed from the 1997-1998 Asian financial crisis. Non-performing loans, which had surged to 13% of the total in 1999, were still elevated at about 6% in December 2002.

Contrast that with 1.5% bad loans at the end of last December; it’s a figure that will keep coming back for scrutiny as the year progresses.

The credit quality in Singapore might still hold up, as banks proactively manage their borrowers’ liquidity. United Overseas Bank Ltd, the smallest of Singapore’s three homegrown lenders, said on Wednesday that it’s setting aside S$3 billion to provide relief, especially to small companies.

Those affected will meet only interest obligations this year. Principal repayment can wait.

But DBS Group’s regional presence could be problematic. A sharp tumble in either the over-leveraged Chinese economy, the epicentre of the epidemic, or turbulence in the frothy Hong Kong property market would put investors’ focus back on provisions for bad debt.

Subdued loan volumes, pricing pressures and spikes in credit costs will complete the trifecta of risks for Asian regional banks.

Globally, banks garner the biggest chunk of their near US$2 trillion (RM8.28 trillion) annual pretax profit from Asia. The growth rate of that earnings pool collapsed to just 3% between 2014 and 2018 from 12% in the preceding four years, according to new research by McKinsey & Co, which comes with a dire message: “Asia’s banks must reinvent themselves or risk disappearing.”

When the dust settles, there may be acquisition opportunities for a well capitalised lender like DBS Group. That’s a story for a later time. The worry right now is that customers won’t be doing merger and acquisition deals because of business uncertainty and anxiety about travel and meetings. That can’t be good news for investment banking fees. — Bloomberg

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.