Asian banks are bracing for a rough ride in the coming six months as the coronavirus epidemic disrupts businesses across the region, likely prompting a spike in bad loans and ultimately dealing a blow to their bottom lines.
Lenders from DBS, Singapore’s biggest bank, to HSBC, the largest of three currency-issuing banks in Hong Kong, have warned in the past two weeks that they will have to set aside additional provisions for loan losses in the first quarter – a risk they say is short term and manageable.
China’s biggest banks are not scheduled to update their guidance for 2020 until next month, but credit ratings agency S&P Global Ratings has forecast that the peak questionable loan ratio for China’s 285 trillion yuan (US$40.5 trillion) banking sector “may almost double” in a worst-case scenario.
“We have also seen it can take years to restore standards in [non-performing loan] recognition, and in the quality of the financial statements, once such standards are loosened,” S&P analyst Ryan Tsang said in a research note. “We see a risk that companies may exploit relaxed standards to drag out repayments for years.”
HSBC, which counts Hong Kong as its largest market and has made a big bet on growth in the Greater Bay Area, said last week it expects about US$600 million of provisions for additional loan losses if the coronavirus outbreak drags on into the second half of the year – its worst-case scenario.
“There will be revenue impact, which will become progressively more acute, if the coronavirus was to continue beyond the next month to six weeks,” Ewan Stevenson, the HSBC chief financial officer, said on a conference call on February 18. “We think that the Q1 impact, as we sit here today, is probably rangebound in the order of about US$200 million to US$500 million relative to our previous planning assumptions.”
DBS said it expects credit costs – the amount set aside for bad loans – to increase by four to five basis points for the year.