United Overseas Bank (UOB) has set up restructuring teams to assess borrowers who have taken a debt holiday amid the gradual unwinding of government relief measures towards the end of the year.
But given the enormous government support around the world, asset prices are unlikely to collapse, with the bank guiding that it does not expect a fallout that was seen during the Asian financial crisis.
UOB posted a 40 per cent drop in second-quarter net profit to $703 million for the three months ended June 30, hurt by weaker income and a surge in provisions set aside for the easing of loan moratoria, chief executive Wee Ee Cheong said at a briefing yesterday.
The $703 million figure compares with $1.17 billion in the same period a year ago. This was weaker than the consensus forecast of $815 million by four analysts in a Bloomberg poll.
Provisions against bad loans surged to $396 million, against just $51 million a year ago, with credit costs rising to 67 basis points. Total general provisions as of June 30 stood at $2.39 billion, 20 per cent up from $1.99 billion a quarter ago. The bank has guided for total provisions to remain between $2 billion and $3 billion for "the next few quarters".
UOB's group chief financial officer Lee Wai Fai said: "Various relief programmes and laws put in place might result in low non-performing loans and low delinquency during this period. While we remain committed to supporting customers through difficult times, we are also expecting credit costs to rise when most moratoria end."
Roughly 16 per cent of UOB's loan book is under moratorium programmes. About 10 per cent of loans in Singapore are under moratorium; in Malaysia it is 63 per cent, and in Thailand it is over 30 per cent.
UOB has projected for about 10 per cent to 15 per cent of loans under moratoria to sour into bad debt in a worst-case scenario. For the remaining loans, the majority will probably need some commercial-base restructuring, said group chief risk officer Chan Kok Seong.
Mr Wee added that credit losses are expected to be spread out over two financial years, noting that credit accommodation across the region, and globally, has made a lot of difference for many businesses with liquidity issues.
"Asset prices are unlikely to collapse because of government support around the world. We don't expect the situation to play out like the Asian financial crisis," he said.
UOB's non-performing loan (NPL) ratio in the second quarter was 1.6 per cent, up from 1.5 per cent a year ago, and unchanged from a quarter ago. The bank has factored in a peak NPL ratio of 3 per cent to 3.2 per cent.
Mr Wee noted that while UOB is one the largest users of Enterprise Singapore's risk-sharing loan facility, which the bank taps to support its small and medium-sized enterprise (SME) customers, only 50 per cent of the loans accepted by SME customers had been drawn down. This signals that their liquidity concerns are manageable, he said.
The board declared an interim dividend of 39 cents per share, down from the year-ago quarter of 55 cents per share.
Total income fell 12 per cent to $2.26 billion. Net interest margin for the quarter was 1.48 per cent, a sharp fall from the 1.81 per cent earned on loans a year ago. The one-month Singapore Interbank Offered Rate as of Wednesday was at a record low of 0.25 per cent.
UOB shares closed up 34 cents, or 1.8 per cent, to $19.76 yesterday.
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