APAC banks face shocking $1.8t credit hit

Axis Bank in India has seen a quarter of its loan book stop repayments.

Banks across the region are showing signs of strain as Covid-19 hit customers applying for moratoriums or outright defaulting on loans. Much of the evidence is so far anecdotal, but what the analysts are hearing is truly shocking, with the example of India’s Axis Bank where 10% of customers representing 25% of loans have stopped repayments. Moreover China is likely to see a doubling of non-performing loans to 10%, whilst over 20% of the region's banks are rated as unstable.

The worst-hit systems will be China, India, and Indonesia, and analysts at S&P are eagerly awaiting more data from other banks to compare the proportion of banks' customers availing the moratorium across the region to see if Axis Bank—or other banks across the region—are outliers compared to peers.

Currently, negative outlooks (about 17% of ratings) significantly outnumber positive outlooks (about 3% of ratings). The remaining ratings on positive outlook represent a diminishing pool of credits influenced by idiosyncratic factors rather than systemic trends.

Indonesia may be hit hardest with credit losses, but even usually rock solid Singapore is seeing loan impairments especially in the oil and gas sector. In April, oil trader Hin Leong, one of the world’s largest, collapsed with $800 million in losses to banks, including Singapore’s DBS. And in May, another Singapore oil trader, Zen Rock, was taken to court by HSBC for owing more than $600 million. Even Stalwart Singapore companies such as Keppel and Sembcorp, who make much of their income from supplying oil and gas drillers with equipment, are facing operating losses, though there is no suggestion that there will be credit losses to their lenders. As of end 1Q20, oil and gas industry exposure as a percentage of total group loans is estimated at a higher ~6% for DBS and ~3.6% for UOB, which is expected to be manageable.

OCBC notes that, in the recent Q1 2020 earnings release, Singapore banks reported stable top line growth and non-performing loan (NPL) ratios of 1.5-1.6% whilst earnings contracted double-digits from a year ago (average sector net profit and pre-provision profits of -30% decline and +2.2% gain YoY respectively) due to substantial hikes in allowances taken to strengthen coverage and pre-empt increased credit risks.

The cut to earnings along with the requirement to allow for losses may mean that dividends will have to be cut, according to OCBC. A difference in payout policies may also influence dividend amounts. UOB’s payout ratio policy implies that the bank’s shareholders will get a lower absolute dividend per share (DPS) amount, in contrast to banks who committed absolute quarterly dividend payments such as DBS, in line with the broad earnings contraction expected in the sector.

In its recent Q1 results update, DBS reiterated its commitment to a quarterly absolute DPS of $0.33/share, which suggests ~6.8% forward yield and raised FY20E dividend payout ratio in the high 70% level. The guidance came understandably with caveats that the dividend policy is subject to management discretion and a base case scenario of lockdowns in major economies easing by middle 2020. On the other hand, in line with their conservative stance, UOB’s management has maintained its guidance for a ~50% payout ratio so long as CET1 ratios remain above 13.5%, citing its focus on maintaining the bank’s stable credit rating.

Singapore banks do have a strong buffer against losses, with a strong sector CET1 ratio at above 14% as of end 1Q20, which may see some softening in the coming quarters but should still remain at decent low-teen levels.

With domestic loans making up two thirds of total loans exposure for the sector and a more prolonged Covid-19 management situation domestically, we expect modest loans growth to contribute towards a challenging recovery outlook for the sector this year. As such, near-term sector performance should be largely in line with the broad equity market, with a more meaningful rebound likely only when the macro growth outlook picks up.