Increasing chances of defaults and ultra-low interest rates are the two major headwinds that would be faced by global banks next year, believes Piyush Gupta, the chief executive of Singapore’s largest bank DBS.
Gupta said that the economic hit of the novel coronavirus pandemic has been cushioned to a great extent by government support around the world, but that support has also “masked the real size” of problems being faced by companies and households. He added that when the support measures are rolled back, such problems will come to fore.
“So I do think we’ll see a pick up in defaults and delinquencies around the world next year,” Gupta said in a television interview.
Anticipating the headwinds of loan losses, DBS – just like many banks globally, have asset aside reserves in the past few months.
The bank said in its third-quarter earnings release last month that about 2.49 billion Singapore dollars (around $1.87 billion) in total allowances have been set aside by DBS between January and September this year. That amount is higher by more than four times of the amount that the bank had set aside in reserves in the same period a year ago.
“Now, whether the quantum of the reserve is adequate is anybody’s guess. I’m quietly confident that we have done enough,” Gupta added.
The CEO also said that growing their lending margins will also be a continuous struggle for the banks because of the expectations that interest rates globally will remain lower for a longer time. But he added that the risks from lower rates could be offset partially by the growth in economic activity during the third quarter as well as a potential easing of tensions between the United States and China.
Economic activities in the a number of North Asian economies such as China, South Korea and Taiwan have already clawed back to pre-Covid levels, Gupta pointed out.
“So as business activity resumes, that should be helpful,” he said. “I think with the new U.S. administration, if the rhetoric between the U.S. and China cools off a bit, I think that will soothe the nerves of the market and that could be helpful as well.”
Even with the banking landscape being set for a shake-up with the entry of four new digital banks, DBS can still grow its market share in the bank’s home market of Singapore, Gupta said. The bank has been growing revenues at “high single-digit” levels in Singapore, he added.
Gupta described DBS as an “integrated” bank that has presence in almost all of the entire banking value chain which includes payments, remittances, financial planning, corporate financing and investments.
“And therefore, I do think our capacity to continue to excel and grow in this market is very, very real,” he said.
(Adapted from CNBC.com)