Singapore banks target lower credit cost in 2018

Every 5bp decrease in credit cost can lift sector earnings by 3%.

Singapore banks are expected to make a clean start in 2018 and lower credit cost. DBS Equity Research forecast credit cost to drop by 6bps to 29bps (2017F: 34bps) and the implementation of IFRS9/SFRS109 to bring about changes. The report declares that every 5-bp decrease in Singapore banks’ credit cost will lift average sector earnings by 3%.

Here’s more from DBS Equity Research:

Based on our estimates, the through-the-cycle credit cost (2003- 2016) stands at 35bps. The question now begs as to how much credit costs will be booked from FY18 with the implementation of IFRS9/SFRS109.

The SFRS109 requires banks to maintain a minimum of 1% collective impairment allowance and specific allowance to be set aside on a case-by-case basis. The Expected Credit Loss (ECL) model includes more forward-looking information to assess credit quality of the bank’s underlying financial assets. It appears that smoothening out earnings by adding or using general provision reserves will no longer be allowed; this could pose upside risk to UOB’s FY18-19F earnings from its sticky 32-bp credit cost guidance. We gauge that the impact would be neutral to mildly positive to capital and P/L.

Banks are now working on how they will treat excess general provision reserves as they prepare for the implementation of IFRS9/SFRS109. The considerations include how much the bank will need going forward post IFRS9/SFRS109, whether it should take advantage of its excess reserves and bump up specific provisions and whether it should transfer the excess into P/L or keep it in retained earnings. There are also tax implications the banks will need to consider.