Relief extension to smoothen out credit costs for Singapore banks: analysts

ANALYSTS see a mild positive on the Singapore banks from the latest move by the Singapore regulator to extend debt relief for certain individuals and small businesses into 2021.

OCBC Investment Research said on Tuesday the latest measures are in line with the ongoing proactive industry efforts to smoothen out the impact of the pandemic on banks' asset quality and ease concerns over potential cliff effects from the expiry of support measures.

"Time will be needed for the credit cycle to play out," it added. "A modest growth outlook and prolonged low interest rates will continue to limit the scope of the sector's earnings recovery ahead."

Citi analysts remain "comfortable" with Singapore banks' credit cost forecasts. "We concede that this could serve to further push back the full recognition of peak non-performing loans (NPLs) into late 2021 and hence add to investor uncertainty," said Citi analyst Robert Kong in a report on Tuesday, referring to the impact from the latest debt extension relief.

"But we remain comfortable with our 2020/2021 cumulative provisions assumptions."

Citi said from discussions with banks, the local lenders expect about 10 to 15 per cent of vulnerable loans booked by the trio lapsing into new bad loans. This comes as vulnerable loans averaged 9.7 per cent according to data from June this year, below his team's projection of 12.2 per cent, Mr Kong said.

The bulk of this "positive surprise", he wrote, comes from DBS, which saw 5 per cent of the group's loans under moratorium as at the middle of this year - a "far lower" proportion than Citi's assumption of 10.8 per cent.

This is likely because geographically speaking, the group's focuses on Singapore and Hong Kong, and has relatively limited exposure to the Asean region outside Singapore. In terms of customer segments, it tends to bank top-tier corporates and property owner-occupants with mortgages, Mr Kong said.

But he pointed out that OCBC and UOB's proportions of vulnerable loans could be overstated due to both banks' geographical exposure to Malaysia.

CGS-CIMB analysts Andrea Choong and Lim Siew Kee said in a report that repayment trends from the expiry of moratoriums in Malaysia at end-Sep 2020 will be a useful gauge of how reliable credit cost guidance can be.

"Deferments are unlikely to affect earnings estimates materially given that interest will accrue on deferred principal amounts," they added.