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ASEAN banks told to stay cautious with more COVID-19 trouble ahead

Southeast Asia's lenders report muted earnings as central banks ask for belt-tightening

dbs ocbc uob
Singaporean banks have increased provisions after what one called a 'tough' quarter.

SINGAPORE -- Southeast Asia's largest lender DBS Group Holdings on Thursday warned of further months of pandemic difficulty as it booked a net profit of SG$1.25 billion ($910 million) for the three months ended June -- a 22% dip from a year ago.

The bank's outlook mirrored those of its counterparts elsewhere in the Association of Southeast Asian Nations, as lenders grapple with the risk of more non-performing loans as the coronavirus outbreak rattles the cash flows of corporate borrowers.

"This was a tough quarter," DBS Chief Executive Piyush Gupta said at a results briefing. "We're still trying to be cautious and prudent and so we bumped up general allowances again."

First-half total allowances for DBS increased almost five-fold from a year ago to SG$1.94 billion. Two-thirds, or SG$1.26 billion, of the amount was for general allowances set aside to fortify the balance sheet. General allowances are money that Singapore banks can set aside for anticipated future losses, unrelated to specific exposures.

DBS' local rival, United Overseas Bank, reported net earnings of SG$703 million for the second quarter on the same day -- 40% lower than the same period last year. The lender attributed the performance to declining margins and credit provisioning on the pandemic's effects.

The bank cranked up allowances to SG$396 million for the quarter to strengthen its balance sheet, up from from SG$51 million a year ago. UOB Chief Executive Wee Ee Cheong said at a results briefing that more than half of his company's loan exposure lies in Singapore.

"We pre-emptively set aside higher general provisions to cushion against the uncertainty ahead," he said. "This is a conservative move to strengthen our coverage and balance sheet to withstand any potential credit migration."

The results announced by the two banks were largely in line with analysts' expectations. Priyanka Kishore, Head of India and Southeast Asia Economics at Oxford Economics, told the Nikkei Asian Review that she expected gross value added for financial services in Singapore to grow at roughly half the pace of 2019 this year.

"Singapore banks are also quite well placed in terms of asset quality with very low non-performing asset ratios. Nonetheless, the bleak economic outlook is bound to impact business' expansion plans and impact their investment and credit appetite. This will have some repercussions for the banking sector's profitability," Kishore said.

The city-state's banks could see further COVID-19 fallout from real estate loans, Pramod Shenoi, Head of Asia-Pacific Research at analysis outfit CreditSights warned in a report, noting that it made up about a quarter of loan exposure for the financial institutions.

"With footfalls dropping in shopping malls -- albeit temporarily, retail closures and work-from-home arrangements potentially changing employers' plans regarding the need for real estate, the in-development commercial real estate market is likely to come under pressure, and however well collateralised these properties are, there may be some asset quality issues," he wrote.

In a call for prudence, the Monetary Authority of Singapore -- the city-state's central bank, last month asked local lenders to limit their total dividends per share to investors for this financial year to 60% of 2019 levels, which DBS and UOB have heeded.

The measure was aimed at bolstering the banks' resilience and capacity to keep lending to consumers and businesses with the health crisis dragging on, as Singapore's economy shrank 12.6% on-year in the April to June quarter.

"Mandating prudence on capital usage is largely in line with regulators' cautious stance globally, reflecting the extent of the pandemic's impact," OCBC Investment Research said in a report on DBS and UOB.

"In this respect, Singapore banks are still relatively less constrained than European banks for example, which have been restricted on all dividends and share buybacks this year," it noted.

Maybank Kim Eng analyst Thilan Wickramasinghe also observed that regulators overseeing banking systems with high gearing tendencies globally have typically persuaded financial institutions to consider dividend moderation amid uncertainty.

"We believe ensuring undisrupted credit flow to the economy was the primary driving factor for the call. This should keep domestic loan growth momentum positive and keep non-performing loans from rising too rapidly in the near term," Wickramasinghe wrote about the Singapore central bank's move in a report.

The call for caution was seen in Thailand too, where the kingdom's central bank advised commercial banks to hold interim dividend payments and share buybacks to preserve capital.

Although no clear effects were seen in first half results for Thai banks, the guidance is expected to exert downward pressure on payouts from their performance this year.

Thailand's four megabanks all recorded a double-digit year-on-year decline in net profit for the quarter ending June. Kasikornbank reported a 78% drop, the largest among the four.

Bangkok Bank, Krung Thai Bank and Siam Commercial Bank said their net profit fell by 67%, 53%, and 24% respectively. The four banks said higher provisioning was the primary reason for declines in net profit.

Amid preparation for larger credit losses, however, Bangkok Bank and Kasikornbank said their gross non-performing loans ratio as of June fell slightly compared to the end of 2019. Krung Thai Bank and Siam Commercial Bank reported a small rise in the ratio.

The Thai central bank had asked commercial banks to give small and mid-sized enterprises a moratorium on principal and interest payments for six months on loans of up to 100 million baht, preventing a jump in non-performing loans.

In Indonesia, Southeast Asia's largest economy, the banking sector similarly reflected the woes seen in financial services elsewhere in the region.

Bank Central Asia, Indonesia's largest bank by market capitalisation, said its net profit fell by 4.8% in the six months ended in June from a year earlier, as provisions swelled 167.3% in the same period.

Bank Danamon, a subsidiary of Japan's Mitsubishi UFJ Financial Group, saw a 53% dive in net profit after its cost of credit swelled 87%. CIMB Niaga meanwhile saw a 11.7% drop in net profit, with provision expenses increasing 34.8%.

According to the country's Financial Services Authority, COVID-19-related credit restructuring reached 779 trillion rupiah by late July, with nearly a half being undertaken amongst the country's small and medium enterprises.

Oxford Economics' Economist Sung Eun Jung told Nikkei that the low interest rate environment and pandemic-induced non-performing loans, especially from hard-hit sectors, would continue to weigh on earnings for banks in Southeast Asia.

"With the risks of a second wave of coronavirus outbreak rising globally, we remain downbeat on the outlook for the hospitality and tourism sectors," she said. "Asset risks from loans attached to these sectors are likely to remain high for some time."

Additional reporting by Masayuki Yuda in Bangkok and Shotaro Tani in Jakarta

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