Sufficient provisioning coverage and strong capital position enabled Singaporean banks to meet credit demand during the COVID-19 crisis
Singapore’s gross domestic product (GDP) plunged deeper in 2020 with a contraction of 6% continuing the downward trend that began in 2018. The COVID-19 pandemic has adversely affected the country’s economic activities especially in the second quarter of the year plummeting by 42.9% quarter-on-quarter due to the ‘circuit breaker’ policies implemented in April to May that suspended business activities. Nevertheless, the easing of restrictions and gradual re-opening of the economy in the second half of the year have alleviated economic conditions.
The adverse impacts of COVID-19 are also reflected in other macroeconomic indicators. Inflation decreased to -0.4% by year end as a result of weak consumer demand and plummeting prices. It is estimated to remain subdued in 2021. Meanwhile, Singapore’s national debt-to-GDP continued to build up as a result of costly stimulus measures in combatting the pandemic.
Singapore’s banking sector exhibited resilience during the year as banks continued to facilitate credit supply amid the volatile operating environment. According to the Monetary Authority of Singapore (MAS), the total credit growth of the sector spiked in March 2020 supporting the economy’s credit requirements and tapered down to 4.9% year-on-year (YoY) in October 2020. Increased interbank loans and liquidity measures accounted for the credit growth during the year. However, non-bank loans declined due to the economic collapse and weak external demand.
Although credit risk heightened during this period, the banking system’s non-performing loan (NPL) ratio remained manageable despite rising to 2.7% in the third quarter (Q3) of 2020 from 2.0% in the same period last year. Banks increased loan provisions in anticipation of the economic slowdown while authorities introduced policy measure to stabilise liquidity conditions. As of Q3 2020, total provisioning coverage was 103.1% and specific provisioning coverage was 65.0%.
The three domestic banking groups were able to safeguard their franchises and were involved in government loan schemes to businesses and individuals. DBS Bank (DBS) exhibited the strongest financial performance in 2020. The bank recorded the highest net profit among its peers as its fee income bounced back driven by wealth management and card fees. Although foreign banks such as Citibank and HSBC reported the lowest NPL, DBS was still able to mitigate credit risk effectively with an NPL ratio of 1.51%.
Although the economy is projected to modestly improve in 2021 as it emerges from a lockdown, banks’ operations will remain vulnerable to pressures from low interest rates and potential credit losses. Financial institutions must remain vigilant and prudent by actively monitoring risks as consumer activity remains restrained with looming resurgence of infections. Banks are expected to increase provisions and capital buffers even during the recovery period.