Singapore's banks continued to provide for bad loans in the third quarter, though the pace slowed sharply, indicating that the lenders may have built sufficient buffers against a pandemic-induced increase in nonperforming assets.

DBS Group Holdings Ltd., Oversea-Chinese Banking Corp. Ltd., and United Overseas Bank Ltd. all appear to have front-loaded their provisions earlier in the year as the coronavirus pandemic raged. But with the spread of the disease slowing across most of Asia, the banks may be better prepared for an expected increase in bad loans due to the lagged impact of the virus outbreak on businesses.

Still, all three banks continued to increase their total reserves coverage in the September quarter. The allowance coverage ratio at DBS as of Sept. 30 was 107%, from 106% at the end of the previous quarter. Including collaterals, the coverage is now at 200%, DBS said in its Nov. 5 earnings statement. OCBC's total NPA coverage ratio increased to 109% at the end of the third quarter, from 101% three months prior, while that for UOB rose to 111% from 96%, according to the lenders' results statements.

"The coverage ratio increasing shows that most of the provisions set aside were more 'pre-emptive' than 'reactive', as any write-off will reduce amount of non-performing assets which will lower coverage again," Tay Wee Kuang, an analyst at Phillip Securities, told S&P Global Market Intelligence. "Looking at the amount of provisions being lowered over the past two quarters, this shows that banks will probably experience some earnings recovery in [full year 2021]."

The Monetary Authority of Singapore held its policy steady at its last review on Oct. 14, as it noted a rebound in the economy in the third quarter following a sharp contraction in the previous three-month period. The MAS expects the economy to recover next year, though the underlying growth momentum may stay weak. The government said on the same day that the economy expanded 7.9% on a quarter-on-quarter seasonally adjusted basis in the September quarter, from a 13.2% contraction in the previous three months. From the previous year, the economy contracted 7.0% in the third quarter, after a 13.3% decline in the second quarter.

Conservative provisioning

DBS said its allowance for credit and other losses in the third quarter was S$554 million, down 35% from S$849 million made in the previous three months. "We continue to adopt a conservative stance on provisioning," CFO Chng Sok Hui said in a conference call with reporters. There may be room for write-back should the situation "be more benign," she added.

OCBC reported that its net allowances fell to S$350 million, down 53% from the S$750 million it set aside in the second quarter. UOB set aside S$342 million as allowance against non-impaired loans in the third quarter, compared with S$378 million in the previous quarter.

However, for all three banks, the allowances were still higher than in the third quarter of 2019 as the lenders prepare for a potential increase in nonperforming loans after loan moratoriums allowed by the central bank expire on Dec. 31.

"In terms of [bad] loans formation, we should observe some non-performing loans forming when we enter 2021, but I am hopeful that the rate of formation will be slower, and largely offset by the front-loaded allowances undertaken by the banks over the past 3 quarters," Tay said. "As such, should the banks be required to provide more allowances to replenish reserves, the rate of provision should be lower as compared to what was reported over the past 3 quarters."

Profit drag

All three banks posted on-year declines net profit in the third quarter, mainly due to the drag from lower interest rates and higher allowances compared with the third quarter of 2019. DBS posted a 20% on year decline in net profit in the September quarter, OCBC reported a 12% fall while UOB's net fell 40%.

DBS, Southeast Asia's biggest bank by assets, said its net interest margin shrank to 1.53% in the third quarter, from 1.62% in the second quarter and 1.90% in the third quarter of 2019.

DBS reported S$543 million of new nonperforming loans in the third quarter, compared with S$115 million in the second, bringing total non-performing assets to S$6.5 billion at the end of the quarter. Piyush Gupta, the lender's CEO, said that the jump was attributed to a "handful of clients" in China, Indonesia, and Singapore. He added that the bank does not expect these loans to take up provisions but wanted to be conservative in the accounting.

Meanwhile, UOB's non-performing assets at the end of September were reported to be at S$4.30 billion, down from S$4.63 billion three months prior. The bank's nonperforming loans ratio was at 1.5% as at June 30, down from 1.6% in the prior quarter.

"About 10% of UOB's loans are under moratorium or relief, which we believe has slowed down the formation of new NPLs," according to a Nov. 4 S&P Global Ratings note. "Some proportion of vulnerable borrowers in this group could transition to NPLs in 2021 as moratorium gradually unwinds in a phased manner across the region."

OCBC's non-performing assets at the end of the third quarter stood at S$4.26 billion, down from S$4.35 billion in the prior quarter. The bank's nonperforming loans ratio stood at 1.6%, unchanged from the prior quarter.

As of Nov. 4, US$1 was equivalent to S$1.36.