- HSBC and Singapore’s biggest banks flag coronavirus epidemic is likely to swell loan losses
- Most lenders see short-term impact if virus is contained in coming weeks; S&P said worst-case, peak questionable loan ratio may almost double
Asian banks are bracing for a rough ride in the coming six months as the coronavirus epidemic disrupts businesses across the region, likely prompting a spike in bad loans and ultimately dealing a blow to their bottom lines.
Lenders from DBS, Singapore's biggest bank, to HSBC, the largest of three currency-issuing banks in Hong Kong, have warned in the past two weeks that they will have to set aside additional provisions for loan losses in the first quarter " a risk they say is short term and manageable.
China's biggest banks are not scheduled to update their guidance for 2020 until next month, but credit ratings agency S&P Global Ratings has forecast that the peak questionable loan ratio for China's 285 trillion yuan (US$40.5 trillion) banking sector "may almost double" in a worst-case scenario.
"We have also seen it can take years to restore standards in (non-performing loan) recognition, and in the quality of the financial statements, once such standards are loosened," S&P analyst Ryan Tsang said in a research note. "We see a risk that companies may exploit relaxed standards to drag out repayments for years."
HSBC, which counts Hong Kong as its largest market and has made a big bet on growth in the Greater Bay Area, said last week it expects about US$600 million of provisions for additional loan losses if the coronavirus outbreak drags on into the second half of the year " its worst-case scenario.
"There will be revenue impact, which will become progressively more acute, if the coronavirus was to continue beyond the next month to six weeks," Ewan Stevenson, the HSBC chief financial officer, said on a conference call on February 18. "We think that the Q1 impact, as we sit here today, is probably rangebound in the order of about US$200 million to US$500 million relative to our previous planning assumptions."
DBS said it expects credit costs " the amount set aside for bad loans " to increase by four to five basis points for the year.
Credit ratings agency Moody's Investor Service said on Tuesday that non-performing loan (NPL) ratios at DBS and its Singapore rivals Oversea-Chinese Banking Corporation and United Overseas Bank are likely to rise to 1.6 per cent to 1.7 per cent this year as a result of economic disruptions from the outbreak, from 1.5 per cent at the end of 2019.
Economists have warned China's economic growth, which was already slowing, could dip to as little as 4.4 per cent in 2020 and weigh on the regional economy. China's gross domestic product (GDP) grew at 6.1 per cent last year, its slowest pace in 29 years.
Standard Chartered said the coronavirus could potentially affect 42 per cent of China's GDP because of its effects on the electronics, automobile, construction, retail, transport, accommodation, catering, real estate and recreation sectors.
"There is ample evidence that the outbreak has taken a heavy toll on these sectors," Wei Li, the bank's senior China economist, said in a research note Friday.
The People's Bank of China and other financial regulators have urged banks to lend more to support struggling businesses, with the central bank saying a "small increase" in NPLs would be "tolerated" to get companies back to work as soon as possible. Banks in Hong Kong and Singapore also have announced measures to support struggling small businesses and retail customers, including interest-only payments on mortgages and commercial loans.
Paul McSheaffrey, a partner at accountancy firm KPMG said banks in Hong Kong are likely to see higher impairment provisions as support measures are rolled out.
"Those loans may not actually be bad. The principal could be repaid, but the fact that it's delayed and that there's a separate agreement with the borrower will cause a perception of higher risk and that will be a higher provision," McSheaffrey said. "We will undoubtedly see some losses and higher losses coming through, particularly in Hong Kong and China."
To be sure, banks' balance sheets in the region are relatively robust. NPL ratios at lenders in China and other economies hit hard by the outbreak, including Hong Kong, Japan, South Korea and Singapore, are some of the healthiest in the region.
China's NPL ratio was 1.8 per cent at the end of the first quarter 2019, the latest set of data available, while Hong Kong's NPL ratio was 0.6 per cent and Singapore's was 1.3 per cent, according to the International Monetary Fund.
By comparison, the NPL ratio in India, the third-largest economy in the region behind China and Japan, was 8.9 per cent at the end of last year's first quarter and 0.9 per cent in the United States.
The vast bulk of the coronavirus cases are in mainland China, followed by South Korea and Japan. Singapore has the biggest number of confirmed cases in Southeast Asia with 90 afflictions at last count, more than the 81 confirmed cases and two fatalities in Hong Kong.
A JPMorgan analyst said investors should remain constructive on the financial sector as bank stock valuations remain attractive, balance sheets are robust and the industry is likely to benefit from improving economic conditions in the second half of the year.
"Our base case view is the virus outbreak will not derail the economic activity for more than a few months," JPMorgan analyst Mslav Matejka, said in a research note on Monday.
For the moment, many banks are forecasting the coronavirus outbreak to be a temporary drag on the region's economy, with several citing their experience during the severe acute respiratory syndrome (Sars) outbreak in 2003 as a potential template.
DBS said the outbreak is likely to affect it for one quarter as it did during Sars. "Even if it was double that, it would imply an incremental credit cost of $250 million to $300 million. The general allowances that we have built up over the past year have been robust," Piyush Gupta, the DBS chief executive said, on a conference call on February 13.
Still, the epidemic comes at a challenging time for Asia's banks. Margins are already being pressured by easing monetary policy by central banks in the region and a slowdown in global growth following the US-China trade. Several markets, including Hong Kong and Singapore, also are expected to see the debut of new virtual banks that could further cut into profits this year.
"That downward pressure will continue to bite," Andrew Gilder, EY's Asia-Pacific banking and capital markets leader, said. "I don't see markets in this region going to negative rates, so there's only so low (policymakers) can go. But, the market demands a lower rate on the cost side. If the deposit rates are floored at zero in the region, the borrowing rate for the bank's customers isn't and can continue to go down a bit. That squeezes the margin."
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