COVID-19 may spoil Singapore banks' new year despite good 2019 results

The virus and lower interest rates may hike up NPLs and weaken profits.

Whilst 2019 was good for Singapore’s three largest banks, with non-performing loan (NPL) ratios remaining at 1.5% since 2018, the new year may ring in problems for the sector as the COVID-19 outbreak persists, according to a Moody’s report.

Vice president-senior credit officer Eugene Tarzimanov expects that the negative headwinds of the coronavirus and lower interest rates will push NPLs up and profits down, but capitalisation and liquidity will stay strong.

NPL ratios are expected to rise 1.6 to 1.7% this year owing to disruptions caused by the virus. Five to 10 percent of the banks’ total loans are to borrowers particularly in danger of a prolonged outbreak such as hospitality, trade, retail, food and beverage, but headwinds may be contained in the next months.

Return on assets (ROAs) bounced back in 2019 supported by good net interest margins (NIMs), wealth management income and trading gains, where DBS outpaced OCBC and UOB. However, NIMs will decline across Asia this year due to monetary easing whilst credit costs will increase as asset quality decays. Growth in loans will be weak, the report said.

The banks’ Common Equity Tier 1 (CET1) ratios are still high at 14.1-14.9% at end-2019 with OCBC at the top. Likewise, capital ratios will stay high as growth in risk-weighted assets will be modest.

Loan-to-deposit ratios (LDR) is still below 100% for both Singapore dollar and US dollar portfolios, with banks also posting healthy liquidity coverage ratios (LCRs) and net stable funding ratios (NSFR). Liquidity may fare better amidst robust levels due to weak loan growth.