Southeast Asian banks are seeing rising non-performing loans (NPLs) this year, as forbearance periods sputter out and the real impact of the Covid-19 pandemic on businesses and individuals becomes clearer. But this is hardly going to be another 1997/1998 Asian financial crisis, with double-digit NPLs, bank collapses, corporate bankruptcies, crashing currencies and soaring public debt. In general, the region’s central and commercial banks have learned their lessons from the 1997 crash and have plenty of buffers to weather this comparatively mild storm.
The region’s central and commercial banks have learned their lessons from the 1997 crash
This is not to say that the Covid-19 crisis has been a painless one. With the exception of Vietnam, all the southeast Asian economies saw contractions in 2020, along with rising unemployment and upticks in poverty. The Philippines’s economy led the region with a 9.5% shrinkage in its gross domestic product (GDP) last year, thanks to several waves of Covid-19 outbreaks and subsequent lockdowns, especially in the capital Manila. Thailand, while performing fairly well in containing the pandemic’s spread, has done less well in containing the resulting economic malaise. Its GDP contracted 6.1% last year and is heading for a slow recovery of 2–3% in 2021, due to an over-reliance on the tourism industry which accounts for 18% of GDP (12% of that from foreign tourists who have all but disappeared).
The age of forbearance
The region’s central banks have been generous with their forbearance measures, with some proving more so than others. Indonesia, which has the region’s largest population at 270 million and the highest incidence of Covid-19, with 1.2 million cases and 34,500 deaths by March 2021, saw its consumption-driven economy contract 2.1% last year. While economists predict a V-shaped recovery in 2021 (with more than 6% growth), the banks’ lending portfolios have been hard hit. Bank of Indonesia had originally intended to end its forbearance on banks’ NPLs at the end of the first quarter of 2021, but has since extended the deadline until the end of 2022. NPLs at year-end were estimated at 3.5% and are likely to hit at least 4% by year-end 2021, but the real number may not become clear until 2022.
Clarity on banks’ NPLs depends on how long the forbearance period lasts. “For those that have moratoriums rolling off in the first half of the year, I would expect a lot more visibility [on NPLs] by the end of the year,” says Tania Gold, senior director in charge of south and south-east Asia financial institutions at Fitch Ratings in Singapore. “Those that have extended into next year, depending on how much of their loan book is under restructuring, we might have to wait a while longer.”
Singapore, which experienced a 5.8% contraction in GDP last year, is not yet out of the woods when it comes to the NPL picture, although the bigger banks have already provisioned heavily against bad loans last year. S&P Global Ratings estimates the city-state’s NPL ratio will max out at 3% during 2021, compared with 2.5% in 2020. Singapore banks’ Tier 1 capital adequacy ratio (CAR) is around 15% — high, but not unusually so in the region.
Among Indonesian banks the average Tier 1 CAR was 22% last year, while among Thai banks it was about 20.1%. “The Thai banks, along with the Indonesian banks, are the highest capitalised of the markets we cover in south-east Asia,” says Ms Gold.
Most analysts think the region’s banking system is well buffered against the Covid-19 crisis. “The Vietnamese banks’ CARs are at the lower end, but this was the position pre-pandemic, so we’re not thinking the Vietnamese banks will need help from the state because of Covid-19,” Ms Gold adds. “We’re seeing banks from the more developed markets looking for bank acquisitions in Vietnam, so I don’t think we’re seeing a slew of failures happening at all.”
Vietnam riding ‘stay-at-home’ high
The outlook on a bank system’s NPLs also depends on the pace of the economic recovery. In Vietnam’s case, the prospects for a swift recovery look good — the government was quick to contain the Covid-19 spread and although there have been three minor outbreaks, total cases as of March 10, 2021 stood at 2,526, with 35 deaths. The resulting lockdowns put a damper on domestic consumption and manufacturing, but the two sectors can expect more than 10% growth in 2021, fuelled by exports to the US and Europe, and consumer confidence in their bright economic future, economists say.
Vietnam, a favourite for foreign direct investment in recent years, especially in high-tech sectors such as electronics, has benefitted from the surge in demand for stay-at-home goods in the West. The country’s exports in January 2021 to the US and Europe jumped 70% and 55% year-on-year, respectively, and are likely to continue their upward trajectory all year. Labelled a “currency manipulator” by the US Treasury last year, Vietnam has likely benefited from former US president Donald Trump’s election defeat in November 2020. “In our understanding, the intention was for the Commerce Department to use the Treasury Department’s labelling Vietnam as a currency manipulator as an excuse to raise tariffs, but none of that is going to happen now,” said Michael Kokalari, chief economist for VinaCapital, a private equity firm based in Vietnam. VinaCapital predicts Vietnam’s GDP will grow at least 6.5% in 2021, after topping 2.9% growth last year.
Vietnamese banks will, nonetheless, experience a hike in NPLs, especially in their retail banking and small and medium-sized enterprise (SME) portfolios. The central bank granted the banks an open-ended forbearance period that should be over by early second-quarter 2021, after which the central bank is expected to allow the commercial banks a three-year extension for provisioning for their NPLs. Of course, as the economy recovers quickly, those NPLs are likely to come down.
“If I had to guess, unambiguously, I would now lower my estimate to below 6% for NPLs this year,” Mr Kokalari says. “I’m saying a 6% ceiling for the total NPLs that have been accumulated.”
Philippines prepares for NPL spike
While the Philippines experienced a sharp GDP contraction in 2020, it is expected to enjoy a fairly swift recovery in 2021, barring another major outbreak of Covid-19. The central bank, Bangko Sentral ng Pilipinas (BSP), is projecting 6.5–7.5% GDP growth in 2021, fuelled by a resumption in domestic consumption and in infrastructure spending. The crisis, however, will take its toll on the Filipino banks’ NPLs, especially to the retail and SME sectors, which account for about 25% of all lending. S&P Global Ratings has forecast that the NPL ratio will hit 6% by the end of 2021, compared with 3.6% in 2020.
BSP’s relief measures for the banks have included allowing them to stagger their booking of credit losses and lowering the credit risk rates of loans staggered to SMEs from 75% to 50%, subject to approval by the central bank. On February 16, 2021, the BSP also pushed through the Financial Institutions Strategic Transfer (FIST) Act, permitting banks to set up Fist corporations registered with the Securities and Exchange Commission, as vehicles for parking their distressed assets.
The concept is similar to the special purpose vehicles set up in the Philippines in 2002 to handle the mountain of bad debt resulting from the 1997/1998 crisis, when NPLs peaked at 17%. “What’s different about the FIST is that we are really being proactive here, prior to an elevated NPL ratio we have already provided this type of vehicle, with legislation,” says Chuchi Fonacier, BSP deputy governor in charge of the financial supervision sector. “This is now being provided as an opportunity for the banks to unload their non-performing assets (NPAs).”
The NPAs — which include NPLs and real estate and other properties acquired — would be transferred at a discount to the FIST corporations, in which banks are permitted to hold a maximum of only 10% share in.
The decision to utilise the FIST option will be left up to discretion of the individual banks. Many of the larger banks, which have weathered the Covid-19 storm well, may feel disinclined to bother with the scheme. “The big banks have the capacity to deal with their NPLs and they are very well capitalised, but there could be some smaller institutions that really benefit from the FIST, or maybe some medium-sized savings banks or the thrift banks. Actually, at this moment, the rising NPLs are not a serious threat,” Ms Fonacier says.
At the end of January 2021, the NPL ratio was still manageable at 3.7%, and BSP estimates it will peak at 5–6% at year-end 2021. “We wanted FIST as merely a proactive measure. This is an option for the banks if they believe they would like to offload their debt and preserve their capital to continue lending to other viable businesses,” Ms Fonacier adds. The main goal of the FIST scheme is to help the banks free up their time to concentrate more on new loans, especially to the hard-hit SME sector.
Thailand struggles with tourism
Bank of Thailand (BOT) is working on a similar vehicle for parking Thai banks’ mounting NPLs, especially for the hospitality industry which has been devastated by the Covid pandemic. There have been near zero arrivals of international tourists since April 2020, when two month-long lockdowns were enforced nationwide. With international tourists accounting for 12% of GDP, their absence has taken a large chunk out of the economy and left thousands of hotels without guests, airplanes without passengers and entertainment venues without customers. Bank loans to hotels alone make up about 3% of the banks’ credits, BOT says.
In April 2020, the BOT launched a Bt500bn ($16.3bn) soft-loan scheme intended to be used by the banks to provide low-interest loans to SMEs in need of cash to cover their operating expenses, such as hotels trying to keep their properties going, despite record low occupancy rates. The banks had only taken up a quarter of the scheme’s funding quota by year-end 2020 — testimony to its lack of popularity and their reluctance to lend more money to SMEs, especially in the struggling tourism sector.
After ending a debt moratorium on SME loans in October 2020, the BOT has pushed for pre-emptive debt restructuring to prevent viable borrowers from going under, and in early 2021 came up with an asset warehousing concept, which it hopes to push through soon after fine-tuning the new law. Under the scheme, banks would set up warehouses in which they would settle debt with business borrowers, and assume ownership of collateral, such as a hotel property or production plant, with an agreement that the owners have first right to purchase their properties back a few years down the road. Banks may also rent out the properties to the owners to continue operating the sites themselves.
The asset warehousing could be a win–win scheme for the banks and business owners
“The asset warehousing could be a win–win scheme for the banks and business owners,” says Jaturong Jantarangs, assistant governor, supervision group at the BOT. “Banks could keep their balance sheet clean, although properties are still on their books as NPAs. At the same time the owners could continue operating the properties, so they are income-generating assets,” he says.
“And if they intend to operate the properties after the Covid-19 situation improves, the asset warehousing scheme would give them the right to buy the properties back,” Mr Jantarangs says, while stressing that the warehousing is just an option. “Our focus with the banks is on pre-emptive restructuring. What we do as a bank regulator is try to make sure the banks do not take away umbrellas when it is raining heavily, without compromising prudential safety and the soundness of the banks.”
It remains to be seen whether the Thai banks will find the asset warehouses an attractive option. “The idea is good, but the issue is in the implementation because this is only going to work if the value of the loan is smaller than the value of the property,” says Charl Kengchon, executive chairman at Kasikorn Research Centre, a think tank owned by Kasikorn Bank. Mr Kengchon noted that the BOT will need to offer tax and other incentives, such as waivers on transfer of property fees, if they are going to attract the banks to the scheme.
Back in 1999, when Thai banks’ NPLs had reached 47% of the total, the government set up asset management funds to handle the crisis that took several years to offload. This year, Thai banks’ NPLs could reach 6%, and even at that rate no one is unduly worried about the system’s stability. “Back in 1997 we had what is called ‘a liquidity problem’. But today CAR is still strong, liquidity is still good so we are just holding on and waiting for the turnaround from the crisis,” Mr Kengchon says.