Monday, 16 May 2022

Chinese, Hong Kong and Singapore banks reduce loan loss provisions to below pre-COVID levels

5 min read

By Wendy Weng

Banks in most Asian markets booked lower provisions to cover potential loan losses as economies recover, which has contributed to the improved profitability in 1H 2021

  • Singapore and Hong Kong banks were more aggressive in reducing provisions
  • Banks in Indonesia and Vietnam posted an increase in provisions
  • Provisions at Chinese, Hong Kong, and Singapore banks dropped below pre-pandemic levels

Banks made substantially higher provisions to cover potential defaults in loan books as the COVID-19 uncertainty mounted, which weighed heavily on bank earnings. In 2021, the loan loss provisions at banks in most Asian markets have shown a downward trend amid improving economic outlook, while some still took a more prudent approach to build buffers. The level of bank loan loss provisions has been affected by the COVID-19 relief measures and the economic conditions.

Overall, the Asian banking sector posted higher net profit in the first half (1H) of 2021 compared with a year earlier, bolstered by lower provisioning against bad loans. This is based on the analysis of data of 251 commercial banks and financial holding companies (banks) in seven Asian markets namely, China, Hong Kong, Indonesia, Malaysia, Singapore, Thailand, and Vietnam. On average, bank loan loss provisions in these seven markets fell by 19% in 1H 2021, based on the weighted average of growth in bank loan loss provisions across these markets. While loan loss provisions surged the most in Singapore banks in 2020, they also recorded the largest drop in provisions in 1H 2020.

Singapore and Hong Kong banks were more aggressive in reducing provisions

DBS, OCBC, and UOB reported a combined $4.7 billion in loan loss provisions in 2020, compared to $1.5 billion in 2019. After recording the sharpest increases in loan loss provisions in 2020, Singapore banks saw provisions drop the most in 1H 2021. The provisions at DBS, OCBC, and UOB fell by 95%, 72%, and 52% in 1H 2021, respectively. DBS took $66 million in loan loss provisions in 1H 2021 compared with $1.38 billion in 1H 2020, as the bank is well-positioned to manage the potential deterioration in asset quality. The bank said total provisions is not expected to exceed $372 million (S$500 million) in 2021 and it wrote back provisions of $52 million in the third quarter (Q3) of 2021. The lower provisions helped it boost its net profit by 46% year-on-year (YoY) in the first nine months of 2021.

Total loan loss provisions at Hong Kong banks soared by 59% in 2020 and decreased by 71% in 1H 2021. Combined, Hongkong and Shanghai Banking Corporation (HSBC), Bank of China (Hong Kong), and Standard Chartered Bank (Hong Kong), booked loan loss provisions of $398.5 million in 1H 2021, down from $2.13 billion in the same period a year earlier. In addition, Malaysian banks more than tripled their loan loss provisions in 2020. Hong Leong Financial Group and Public Bank raised provisions for loan losses by 955% and 616% in 2020, respectively. Loan loss provisions at Malaysian banks recorded a decrease of 32% in 1H 2021.

Banks in Indonesia and Vietnam posted an increase in provisions

Indonesian banks included in the analysis saw total loan loss provisions up by 60% YoY in 2020 and 24% YoY in 1H 2021. Around 65% of the Indonesian banks boosted the provisions in 1H 2021. Bank Rakyat Indonesia, the largest bank in the country by total assets, started to raise its loan loss provisions since 2H 2020. The bank’s provisions declined by 6% YoY in 1H 2020 and surged by 120% and 123% in 2H 2020 and 1H 2021, respectively. The bank set aside $1.01 billion in loan loss provisions in 1H 2021, the highest among banks in the six markets, except for China. The growth in total loan loss provisions at Vietnamese banks accelerated in 1H 2021. BIDV, Vietinbank, and Agribank in Vietnam increased the provisions by 76%, 105% and 119% YoY in 1H 2021, respectively. 

Indonesian Financial Services Authority (OJK) extended the regulatory forbearance for restructured loans from 31 March 2022 to 31 March 2023. The extension continues to ease the pressure on banks’ asset quality and profitability in the short term, and banks will have more time to build loan loss provisions.

Provisions at Chinese, Hong Kong, and Singapore banks dropped below pre-pandemic levels

Indonesian banks recorded the highest loan loss provisions relative to the size of their loan book, followed by banks in Thailand and Vietnam. Indonesian banks have more aggressively built their provisions. However,  bank lending growth has remained depressed. Loan loss provisions at Indonesian banks totaled 1% of gross loans in 1H 2021, up from 0.51% in 1H 2020. Banks in Hong Kong and Singapore maintained the lowest level of loan loss provisions among all the seven markets, with the provisions to total loans ratio of 0.07% and 0.09% in 1H 2021, respectively.

The loan loss provisions at Chinese, Hong Kong, and Singapore banks fell below pre-pandemic levels. The loan loss provisions at Hong Kong banks were equivalent to 0.13% and 0.14% of loans in 1H 2020 and 2H 2020, while Singapore banks had a ratio of 0.09% and 0.14% in 1H 2020 and 2H 2020. Although Chinese banks booked higher loan loss provisions in 1H 2021 compared to 2H 2020, the ratio of loan loss provisions to total loans stood at 0.52% in 1H 2021, lower than 0.6% and 0.59% in 1H 2020 and 2H 2020. 

 

This analysis is extracted from The Asian Banker 500 rankings of Asia Pacific's largest and strongest banks. For the full rankings and analyses of banks' balance sheets, please click here.



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