Reality bites for Singapore banks but diversification dims the pain

DBS CEO Piyush Gupta says: ‘If people feel they can’t travel, they don’t spend’

The headline numbers were ugly in Singapore this morning.

At 8.30am, UOB chief executive Wee Ee Cheong explained why his bank’s first-half profit was down 30% year-on-year. Two hours later, Piyush Gupta narrated a 26% decline in the same metric at DBS. “This,” began the CEO, “was a tough quarter.”

The reasons are easily understood: the fact that the Covid-19 pandemic and associated lockdowns brought many of the Asian economies within which the two banks operate to a standstill in April and May, coupled with the central bank response to the pandemic.

Piyush Gupta, DBS

“The full impact of the interest-rate cuts flowed through our entire book,” Gupta says. “It is costing us about 80 million bucks a month [Singapore dollars] and that will probably go up to 100 million bucks a month next year.

“It is obviously a big drag on income, compounded by the fact that in April and May there was a basic lockdown in most of the countries in which we operate.”

Reading the full impact on asset quality is rather difficult, because both banks – and OCBC, which reports tomorrow – have offered relief measures on much of their troubled lending, which means it doesn’t yet flow through into non-performing loan (NPL) numbers and it’s impossible to know to what extent it ever will.

UOB’s NPL ratio stands at 1.6%, DBS’s at 1.5%, in both cases flat on the previous quarter. In fact, the biggest provision at DBS by far is an oil and gas exposure from the first quarter that had nothing to do with Covid-19.

Crises come and go. We believe the best case is for the pandemic to be contained by the end of this year, and for recovery to take place gradually thereafter 

 – Wee Ee Cheong, UOB

We do know, though, that UOB has extended loan moratoria and other relief measures covering 16% of its total loan book, and that DBS has provided relief over S$12.6 billion (US$9.2 billion) of corporate loans and S$5.7 billion of consumer loans, and has built a general allowance reserve of S$3.8 billion.

DBS continues to guide on total allowances of S$3 billion to S$5 billion over two years, S$1.9 billion of it taken in the first half. Coordination of the end to moratoria among the Singapore banks is going to be key to avoid the appearance of going off a cliff if they all do it at once.

Collateral

Both banks talked at length about stability, prudence, provisioning, plus the fact that almost all the lending they have given relief to has sturdy collateral behind it anyway.

Wee Ee Cheong, UOB

“Crises come and go,” says Wee. “We believe the best case is for the pandemic to be contained by the end of this year, and for recovery to take place gradually thereafter.”

Gupta expects DBS’s top-line figure for the year to be roughly in line with what it was last year; Wee is expecting mid-single digit loan growth for this year and a moderate rebound in fees. Both banks made clear they could have paid out their usual dividend had the Monetary Authority of Singapore not urged them to reduce it for reasons of caution.

Behind this sturdy and reassuring talk, some of the really interesting stuff was found in the less obvious material, the surprise stats.

At UOB, for example, the bank’s regional diversification helped it – but in unexpected ways. Singapore operating profit was down 20% in the first half year-on-year, but southeast Asia was up by 13%.

A closer look shows that this climb chiefly represents great performance in the first quarter, prior to the lockdowns, before a fall in the second. But by that time, China had started delivering: north Asia net income was up 60% from the first quarter to the second. Another curiosity: Indonesian profit continued to grow straight through the lockdown.

At DBS, there are other quirks. One is that, even as the cash management business was walloped by a 27% year-on-year decline for first-half income, something that surely can’t be explained entirely by lower interest rates, the bank recorded its best-ever quarter in treasury and markets, up 44% year-on-year for the first half.

Across rates, FX and equity, people were clearly trying to trade their way out of trouble as the pandemic kicked in.

Another is that, confoundingly, DBS’s cost-income ratio went down in the first half, to 39%, a function of managing expenses and the fact that nobody can get on a plane. Gupta knows that can’t last as the income side of the equation comes down – he’s forecasting full-year 43%, flat to last year – but reckons this can be achieved without cutting any jobs.

Regional integration

None of this disguises an unarguably bleak environment for two banks that have built models based partly on regional integration, in regions where people can no longer cross borders. Gupta says the travel component of the credit cards business is about 15%.

“That’s disappeared,” he says. “Linked to that, psychologically, if people feel they can’t travel, they don’t spend,” which is not enough to really trouble the DBS bottom line, but does cause credit problems when hotels, airlines, and food and beverage outlets suffer.

But on the plus side, both banks have invested heavily in technology and have gained at least some tailwinds from the fact that customers have been forced onto their digital channels for want of any alternative, and will likely stay there, offering a better return on equity than those who prefer branches. More prosaically, both have also seen deposits, including current account savings accounts (CASA), climb through the year.

Wee has seen a few crises in his time; his grandfather had to navigate the bank through occupation in the Second World War. He said this morning: “This storm will pass.”