The government response to the COVID-19 outbreak so far has amounted to SGD 54.8 billion – about of 11% of GDP.
The economy is entering uncharted waters, and the level of stimulus is unprecedented as Singapore faces both acute supply and demand shocks.
The Impact of These Measures on Singapore Banks
When you invest into banks like Oversea-Chinese Banking Corp (SGX:O39), United Overseas Bank Ltd (SGX:U11) & Dbs Group Holdings Ltd (SGX:D05) you are not only investing in them directly but also indirectly the quality of governance and the strength of the regulator.
The SG Government has often acted to reduce potential bubbles from being formed (e.g. cooling measures to dampen the en-bloc cycle).
In this instance, they are acting to blunt the economic fallout from what maybe Singapore’s deepest recession on record.
A recession will lead to lower loan growth as the economy slows down. It also means higher non-performing loans (NPLs) as businesses as individuals default.
A certain amount of NPLs are a normal part of a bank’s business model and its up to the management teams to provide for adequate provisions and ensure loan quality does not deteriorate dramatically even in such downturns.
In this case, the government’s proactive measures acts to blunt the deepest fallout of the recession by helping individuals preserve jobs, helping companies manage costs and cash flow issues and help them retain the knowhow so they can jump start their businesses when the market picks up.
All these measures have a direct impact on the banks as they have the effect of helping them maintain credit quality and manage the risks involved.
In the previous crisis, the government used our reserves as to guarantee our nation’s deposits to restore faith into our banking system. As the nature of the crisis is now different, they have drawn down the reserves for fiscal measures to mitigate the fallout.
More to come?
Prime Minister Lee Hsien Loong has already stated the situation is likely to get worst and that the government stands ready and able to stimulate the economy through more fiscal measures.
None of this would have been possible without the deep reservoir of reserves that Singapore has maintained through decades of prudent savings and re-investment.
When it comes to investment, the risk element is as important as the potential money you can make.
Over the years, Singapore Banks have proven to have prudent management.
This coupled with a highly proactive and forceful government response gives me additional comfort that the banks will ride through the storm.
PS: If you found this email informative, check out our full Singapore Banks Investing Masterclass where we cover the key things you need to know when investing in UOB, OCBC & DBS.
Closing In:
The course covers:
- Why Singapore Banks are compounding machines and how to use them to grow your wealth
- Understand the local bank’s business models and what drives their earnings and dividends
- What The Credit Cycle is and how it drives earnings through the economic cycle
- Video Walkthrough – We run through the FY 2019 DBS Investor Update to teach you what key ratios and analysis you should look out for
- Valuation aka When To Buy & Sell – Learn when stock prices are undervalued and how to calculate when it’s a good time to enter and exit
- And More!
The author has a vested interest in shares of OVERSEA-CHINESE BANKING CORP (SGX:O39) and UNITED OVERSEAS BANK LTD (SGX:U11). He does not have a position in DBS GROUP HOLDINGS LTD (SGX:D05).
