If Singaporean lenders are a barometer of the broader industry, the banking sector in Asia may be coming through Covid in better shape than we had any right to expect.
The annual results of OCBC and UOB in consecutive days this week, after DBS two weeks ago, show some strikingly cheerful conclusions about asset quality.
OCBC’s non-performing loan (NPL) ratio, at 1.5%, is flat year-on-year, and UOB’s up just one 10th of a percentage point at 1.6%, the same ratio as at DBS.
OCBC’s total non-performing assets (NPA) were up only 3% year-on-year, a period including the beginning of the pandemic, and actually declined 6% quarter-on-quarter. UOB’s total NPA book, at S$4.6 billion, is not much different to its pre-pandemic level a year ago of S$4.2 billion.
The catch
There is a catch, of course: moratoria and government relief programmes to borrowers, and the question of how much bad news has been kicked down the road that will have to be digested later – but the banks are getting a much better handle on this, too.
UOB, which has prided itself on living up to its ‘right by you’ brand and not abandoning clients through the crisis, saw the amount of its lending book under government relief programmes drop from S$11 billion in December to S$3 billion in January.
A bigger book now is represented by UOB’s own relief programmes it has extended to borrowers, which remain flat at S$10 billion, and are under the analysis of a dedicated internal team that has been put together to aid with restructuring.
Singapore’s banks are prudent and well-run, and not every financial institution in the region operates to the same standards
However, having crunched the numbers in detail, CFO Lee Wai Fai was able to assert on Thursday that the potential new NPA formation is unlikely to be more than S$2 billion, that 90% of the bank’s relief-protected lending is collateralized, and that in the end UOB is likely to come out with a total credit cost on loans of just 30 to 40 basis points, and probably the low end of that.
OCBC is talking about credit costs of around 100bp for the entire pandemic, and perhaps just 33bp this year.
However, there are still moratoria out there that have not yet rolled off.
As OCBC CEO Samuel Tsien acknowledged on Wednesday, while it was great to see the total amount of its loan book under relief protection drop from 4% to 2% from December to January as programmes expired, it is assumed that the more troubled borrowers will be among those who have extended to the longest possible term.
As time goes on, the focus will shift from the end of government programmes to more bespoke negotiations with individual borrowers.
Well provisioned
Yet the signs are good, and Singapore’s banks are so well provisioned – 115% allowance coverage against total NPAs at OCBC, 107% at UOB, or 245% with collateral taken into account – that attention has already started to turn to when banks will unwind their provisioning and put that money to work elsewhere.
Was it really that easy? We should be wary of reading too much into this. Singapore’s banks are prudent and well-run, and not every financial institution in the region operates to the same standards.
Equally, the three banks are not just active in Singapore, and their numbers give a snapshot of southeast Asia and in some cases Greater China, not just their home city state.
Increasingly, it looks like Asia-Pacific economies have been resilient through Covid and that the region’s banks will be able to shrug off the pandemic’s effects sooner rather than later.
