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Banks may lose billions of USD and struggle with bad debts due to Covid-19

Banks may lose billions of USD and struggle with bad debts due to Covid-19

Friday 28, 02 2020
The S&P Global Ranking Organization said that the Covid-19 virus may raise 770 billion of bad debts, tripling the bad debt rate of Mainland Chinese banks.

HSBC and other Asian banks are facing the pressure of losses of billions USD (equivalent to tens of thousands of billion VND) in revenue and the higher back-up costs due to the effects of the Covid-19. The impacts may double if the epidemic is not controlled in March.

The dire situation for the banking system

​HSBC has recently announced a loss of 600 million USD when multiple enterprises have to postpone their operation and the consuming demands reduce significantly.

Meanwhile, the Singaporean bank DBS with the highest total asset in South East Asia has also estimated that its revenue had reduced by at least 100 million USD. The S&P Global Ranking Organization said that the Covid-19 virus may raise 770 billion of bad debts, tripling the bad debt rate of Mainland Chinese banks.

Nikkei Asian Review’s survey shows that each major bank in China may lose more than 300 million USD in revenue as loan and profit growth created by asset management, insurance sales, capital trading and arranging fall. If we include all groups of the most major banks, including international and regional ones, the total impact may triple.

Banks are facing the spreading effect caused by the delay faced by manufacturers and service providers. Analysts said that measures used to stimulate the Chinese economy may ruin the effort to clear 1.5 thousand billion USD of bad debts of the banking sector of this country.

While Chinese banks are forecasted to suffer the majority of damage regionally, Asian banks and other international will have to face lower income fees as customers refrain from trading, asset management investment, and insurance purchase.

The outbreak of Covid-19 has forced several industrial sectors of China to temporarily stop operation and paralyze multiple economic activities of other Asian nations. According to the average estimate of economists, the total domestic product development of China is estimated to drop to 3% in the first quarter of 2020 from 6% in the final quarter of 2019. The Chinese economy is expected to recover in the middle of the second quarter of the year.

The Chinese Industrial and Commercial Bank and the Bank of China said: “If the epidemic is prolonged without being controlled in the upcoming March, several banks will meet difficulties. We are looking for ways to protect our investment categories.”

How they are dealing with the issues

There have been more than 2,700 deaths and tens of thousands of cases of infection that are diagnosed to have been caused by the Covid-19 virus. There are increasing concerns that authorities could not prevent Covid-19 from becoming a global epidemic.

Financial ministers and Central Banks’ governors of the biggest economy in the world noted last week that the risks facing the global growth still remain from the first outbreak of the epidemic. They announced that they would be ready to propose timely assisting solutions.

Banks may lose billions of USD and struggle with bad debts due to Covid-19

Beijing has also cut interest rates, pumped liquidity into the financial system, proposed favorable loans, and reduced taxes for industries that are most damaged by the disease. In Korea, where hundreds of cases are diagnosed with the virus, people have also implemented favorable loans for industries.

According to Andrew Sullivan, Director of the Pearl Bridge Partners brokerage and investment company headquartered in Hong Kong, the loan widening promotion could “save” the Chinese financial system which is struggling with bad debts.

After analyzing the bad debt regulations loosening, S&P estimated that the rate of “doubtful” loans of Chinese banks would reach 10.5% to 11% after the outbreak of the epidemic from the current 7.5% level. According to S&P estimation, if the disease reaches its peak in March, the value of bad debt will rise by 5.4 thousand billion Yuan before the loan assistance and elimination of the Government.

Also according to the S&P report, if banks make adequate provision for new bad debts in the same accounting period, the increase in bad debt could reduce about 350 basis points in the capital adequacy ratio of the industry.

However, they hope that authorities will provide support, such as lengthening the loan repayment period for enterprises and the people to reduce pressure. This will allow banks to gradually reduce “doubtful” loans – those that have not been identified as bad debts – in a longer period. Chinese banks still have not commented on the impacts of the epidemic on their operation.

The most major banks including the four leading companies (ICBC, the Bank of China, the Agricultural Bank of China, and the Construction Bank of China) will soon report their yearly revenue in March. After HSBC’s report of their revenue last week, Financial Director Ewen Stevenson told investors and analysts that the impact of the Covid-19 virus on the bank in the first quarter may cause loan damage of 200-500 million USD. In the worst-case scenario, this number may reach 600 million USD.

​Even though he did not reveal how the virus affects the bank’s revenue, he emphasized that it would get increasingly severe unless the epidemic was controlled in next month. DBS Managing Director Piyush Gupta estimated that this bank would suffer from losses in the first quarter and that the epidemic would be controlled before then. According to him, the revenue may face a loss of 100-150 million USD, equivalent to 1% of the total income, and this number may double if the epidemic lasts longer.

DBS estimated that the asset management fee would reduce after witnessing signs of the decrease in retail revenue, which would affect the credit card trading activities of the bank. This bank has also noticed the impacts on the US Treasury bond sales, especially from small enterprises.

Moreover, credit costs may rise to 50 million USD. Bank of East Asia has lowered its loan growth and income from fees estimation to a single-digit number. Simultaneously, this bank is aiming to cut 10-20 basis points in the credit costs in Hong Kong due to the outbreak.

Vincent Tsui, an Asian analyst in Gavekal Research, stated: “The impact of the Covid-19 outbreak has not been reflected in the Asian banking system, but it seems that the microeconomic impacts are bigger than the estimation of the market.” The level of impact is dependent on “the outbreak time and the government’s policy reaction”.

He also said while the number of bad debts is increasing, there is enough buffer in the banking system to absorb the economic shock.” Asian banks are those with the highest capitalization rate in the world with their capital rate being at the top level, according to the scale of the banks’ capability to absorb future losses, which is 11% higher than the total regional asset. According to the latest financial report, HSBC, Standard Chartered and Singapore are leading the list with more than 14%, while the most major banks in China are holding from 12% upwards.

Meanwhile, the minimum level globally, in accordance with the regulations of authorities, is only 7%. For Asian banks, “If the situation is stable, we will recover in the final half of the year, even though in our opinions, this year’s revenue will face low loan growth pressure”, according to Michael Wu, an analyst at Morningstar. “However, medium- and long-term basic factors remain the same, and the middle class is expected to promote the demand for banking products in income growth in the following years.”

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