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Finance

Singapore banks set tone for ASEAN peers in reducing bad debts

Lenders' profits improve as COVID recovery reduces nonperforming loans

Singapore banks buck fears that ASEAN lenders are being flooded by pools of nonperforming loans. (Photo by Shinya Sawai)

SINGAPORE -- Singapore lenders DBS Group Holdings and United Overseas Bank are pushing back bad debts after a difficult, COVID-pressured 2020, setting the tone for their regional peers in recovering from the pandemic's ill effects.

The virus crisis has allowed pools of nonperforming loans to accumulate in the Association of Southeast Asian Nations, as consumers and businesses struggle with poor economic conditions and face growing hardships in paying back their debts.

At Singapore banks, however, the worst fears are not coming to pass, at least not so far. DBS and UOB this year have reported lower NPL ratios, considered an indicator of the soundness of a bank's loan book. The ratio identifies the proportion of defaults as a part of the overall sum that a financial institution has lent.

Aside from DBS and UOB, Oversea-Chinese Banking Corp., the third of Singapore's three biggest lenders, managed to keep its NPL ratio steady, at 1.5%, for the first quarter, from the previous three months.

OCBC on Friday reported a 115% surge in net profit on the year to hit 1.5 billion Singapore dollars (US$1.1 billion) for the three months ending in March. The results were buoyed by Singapore's economic reopening, which came after months of suppressing COVID infections relatively well. The same success lifted DBS and UOB.

"Earnings were up in our core markets and the momentum across our businesses is building up from renewed market optimism," Chief Executive Helen Wong said.

On Thursday, UOB reported an 18% year-on-year rise in net profit for the first quarter to bag SG$1 billion; it also reduced its NPL ratio to 1.5% from 1.6% for the previous three months.

"Asset quality remained resilient with NPL ratio stable," said Lee Wai Fai, UOB's group chief financial officer, during a results briefing on Thursday. "We have made adequate provisions in 2020, and our reserve coverage continues to be high."

The bank set aside SG$207 million for impaired loans for the first quarter, compared to SG$391 million in the previous three months. It attributes the smaller sum to payment recoveries and a decline in NPL formation during the period.

DBS, Southeast Asia's largest lender, on the other hand, set aside SG$10 million in allowances during the first quarter, down from SG$577 million in the previous three months.

The bank booked a record net profit of SG$2 billion for the period, a 72% year-on-year surge, marking a shift toward pre-pandemic performance levels.

Its NPL ratio declined to 1.5% during the January to March period, from 1.6% in the final quarter of last year. DBS, OCBC and UOB remain among the least affected ASEAN lenders in terms of bad debt.

"The beauty of it is that the amount of reserves that they [the Singapore banks] have built up over the past year -- and you compare it to the loans under moratorium for them -- I think it [the reserve] is more than the loans under moratorium," Tay Wee Kuang, a research analyst at financial services provider PhillipCapital, told Nikkei Asia.

He said in their home market of Singapore, the three lenders have had their risks of bad debt mitigated by the government's move over the past year to allow moratorium schemes to run their course, giving borrowers affected by the COVID recession more time to pay off their loans.

"If in the worst-case scenario whereby all the loans under moratorium -- they suddenly go bad -- they [the Singapore banks] still have sufficient reserves that they have built up over the past year, more than enough," Tay added.

The Monetary Authority of Singapore last week said Singapore's gross domestic product growth could surpass 6% in 2021, at the upper end of official projections, if the global economic recovery does not suffer a setback. This would set the stage for the city-state's financial institutions to repeat their stellar first quarter showings in the months ahead.

Elsewhere in ASEAN, lenders' prospects appear mixed. The Bank of Thailand this week left interest rates on hold at 0.5% and sounded downbeat on the outlook for recovery.

UOB's Global Economics and Markets Research unit noted that Thai policymakers kept a negative tone in the latest monetary policy statement in light of the recent spike in coronavirus infections, saying that "economic growth is likely to sharply slow due to the third COVID-19 wave."

"Thailand's economic growth is likely to be uneven, amid pronounced downside risks should COVID-19 worsen," UOB economist Barnabas Gan wrote in a report issued this week.

Despite the dim view, Bangkok Bank managed to whittle its NPL ratio to 3.7% for the first quarter, down from 3.9% in the previous three months but well north of the benchmark set by Singapore's banks.

Siam Commercial Bank's NPL ratio increased to 3.79% at the end of March from 3.68% at the end of December. At a clutch of other ASEAN banks, the soundness of loan books likewise deteriorated or showed no noticeable improvement.

Indonesia's Bank Central Asia held its NPL ratio unchanged at 1.8% for the first three months of the year from the previous quarter, while Bank Mandiri, another Indonesia lender, had a 3.3% ratio at the end of March, slightly up from the 3.29% for the previous quarter.

In the Philippines, Metrobank held its NPL ratio at 2.4% for the past two quarters, while BDO Unibank's ratio rose to 2.81% during the first three months of the year, from the 2.65% recorded at the end of 2020.

According to Thilan Wickramasinghe, head of research for Singapore at Maybank Kim Eng, the ability of ASEAN banks to roll back NPLs will vary from market to market depending on each nation's progress in vaccinating its population and the speed of economic reopening.

"Singapore banks have a strong gearing to North Asia as well as their home market, both of which are progressing well in terms of recovery," he told Nikkei in explaining why the city-state's lenders appear to have had more success relative to their regional peers at keeping bad debts at bay.

"Continued moratoriums and restructurings will keep NPL risks unclear for longer," Wickramasinghe said. "Resurging COVID cases and the imposition of mini-lockdowns will disrupt recovery in markets such as Thailand, Indonesia and Philippines."

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