HSBC, Standard Chartered and other bank results likely hit by bad loan provisions, analysts say

Investors are bracing for potentially large loan loss provisions at HSBC, Standard Chartered and other big banks in Hong Kong as the coronavirus pandemic weighed heavily on economic activity around the world during the first quarter.

The city's three currency-issuing lenders " HSBC, Standard Chartered and Bank of China (Hong Kong) " are all expected to report their first-quarter results this week beginning on Tuesday. Rivals DBS and Industrial and Commercial Bank of China (Asia) also are among lenders expected to update investors on their quarterly results this week.

In February, many of the banks operating in the city warned that they expected to set aside additional reserves for bad loans in the first quarter. Still, they added that the risk was short term and manageable. That was before the economic environment worsened as the pandemic's spread shut down cities from New York to Singapore.

"When banks reported their results for the end of December, none of them had factored in the real impact of Covid-19," Paul McSheaffrey, a partner at accountancy firm KPMG, said. "We should definitely expect higher loan loss provisions coming through."

When they reported their first-quarter results earlier this month, the biggest American banks, including Bank of America, Citigroup and JPMorgan Chase, set aside a collective US$25 billion for potential loan losses as they prepared to weather a global downturn not seen since the Great Depression. It was the biggest jump in loss provisions in a decade.

Last week, the China Banking and Insurance Regulatory Commission said the non-performing loan (NPL) ratio for the nation's banking sector rose to 2.04 per cent at the end of March as the country's economy shrunk for the first time since 1976. The NPL ratio ended 2019 below 2 per cent.

The coronavirus has infected more than 2.9 million people worldwide and disrupted industries across the board as health officials ordered companies to keep their employees at home. Covid-19, the disease caused by the virus, has killed more than 205,000 people around the globe.

The global economy is expected to contract by 3 per cent this year, a much sharper downturn than the 2007-08 global financial crisis, the International Monetary Fund said on April 14. China and India are the only major economies expected to post positive growth in 2020, according to the IMF's projections.

While generally well-capitalised, the health crisis could force Hong Kong's biggest banks to make similar moves to their American counterparts, analysts said.

In March, Hong Kong's jobless rate rose to 4.2 per cent " its sixth straight monthly increase and the highest rate since November 2010 " and the city's economy is expected to contract further after falling into a technical recession in the third quarter. The US-China trade war and months of anti-government street protests battered the city's economy before the pandemic forced sectors ranging from airlines to hotels to a near standstill.

In February, HSBC, which is based in London, but generated more than 80 per cent of its pre-tax adjusted profit in Asia last year, said it expected as much as US$600 million of provisions for additional loan losses if the pandemic dragged into the second half of the year " its worst-case scenario at the time.

Since then, Hong Kong, HSBC's biggest market, closed its borders to non-residents and ordered more than 1,200 pubs and bars to close to stem the spread and the United Kingdom, its second-largest market, locked down all but essential travel outside the home beginning on March 23. Social distancing and other measures are expected to continue in both markets into May.

HSBC, which reports its results on Tuesday, paused as many as 35,000 job cuts as the health crisis worsened in March, slowing a massive effort to overhaul the lender that has seen a reshuffling of senior management under chief executive Noel Quinn.

HSBC is not alone in feeling the pain. Standard Chartered warned in February that it expected income growth to slow this year, but said it was difficult at the time to put a precise number on potential loan losses. DBS said in February it expected credit costs " the amount set aside for bad loans " to increase by four to five basis points for the year.

Credit Suisse said on Thursday that it set aside 568 million Swiss francs (US$584 million) for credit provisions in the first quarter, primarily driven by the pandemic. The Swiss lender warned it was "still difficult to assess" the scale of the economic effects of the coronavirus and it may have to increase its reserves and further impairments in coming quarters.

Morgan Stanley analyst Nick Lord said credit costs would be a "key concern" and investors would focus on guidance about he revenue outlook, asset quality, and dividend policy at the city's biggest lenders.

"Although banks have been highlighting that underlying asset quality remained benign, we expect them to top up provisions to build up reserves for future periods," Morgan Stanley analyst Nick Lord said in a research note Thursday.

McSheaffrey, the KPMG partner, said the city's banks will face a "challenging" first half of the year because of the increase in bad loans and impairments, but operating conditions could be difficult into 2021 because of historically low-interest rates in the US and Hong Kong.

"Banks generally do not benefit from decreasing interest rates," McSheaffrey said. "They generally benefit from increasing interest rates. That's going to impact revenue and general activity."

Another question for the city's banks will be whether they will continue to pay dividends or hold onto capital in this operating environment.

HSBC and Standard Chartered both cancelled their final dividend payments for 2019 and suspended payments this year after a request from their chief regulators in the UK, sparking a revolt among investors in Hong Kong. Top executives at both banks agreed to forgo their cash bonuses this year amid the backlash.

The Hong Kong Monetary Authority has said it does not believe the city's financial institutions need to suspend investor payments because the banking sector is well capitalised. Regulators in Britain, Europe and New Zealand have all asked banks to suspend their dividends to have capital on hand to help lend to the real economy in light of the global downturn.

Sonny Hsu, senior credit officer for financial institutions at Moody's Investors Service, said banks in Hong Kong are likely to expect gross domestic product growth to very weak in the city and the rest of the region this year, which will lead to increased reserves for bad loans.

"The provisions will likely be magnitudes higher than what they forecast [earlier this year]," Hsu said.

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This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2020 South China Morning Post Publishers Ltd. All rights reserved.

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