DBS Group CEO Piyush Gupta on the Moral Hazard of Banking Bailouts

July 29, 2020

DBS Group CEO Piyush Gupta shares his thoughts with Managing Asia’s Journalist Christine Tan on economy recovery, the challenges in kickstarting employment and business liquidity and the moral hazard of banking bailouts.

By Christine Tan

Christine Tan (CT): Piyush, as CEO of DBS, you’ve had to steer the bank through a pandemic in the last six months. In terms of impact, how would you compare this to the previous crises you’ve been through?

Piyush Gupta (PG): At a national and international level, this is obviously the single biggest crisis I have seen because it is a very human crisis. The height of dimensions of this crisis we have not seen before from an economic standpoint. At the macro-economic level, I think this is going to have more far reaching consequences than anything since the 1930s. In this particular crisis, the crisis will come into the financial system subsequently, so it would be a lagged effect. So, to that extent, this is not as severe in the short term, but overall, I would have to say this is the biggest crisis that mankind has faced in the last 70 years.

CT: As Southeast Asia’s biggest lender, you knew the impact the pandemic would have on small and medium-sized businesses and you took steps to alleviate the cash flow challenges. What sort of progress have you made reaching out to these smaller enterprises?

PG: The first was what we did and will continue to do, which is to provide comfort, solace and a helping hand to customers. It’s quite clear in this crisis that small businesses are running out of revenue. They still have bills to pay, and therefore helping them with cash flow is the best thing that companies like us can do. So, we launched a lot of programs to provide moratorium on principal repayment, et cetera; and then the governments came in and most countries stepped in to give us the capacity to do new money and new financing with government support. So, all of that has been focused on trying to make sure that companies have enough liquidity to keep them going in the short term.

The real problem is going to be the long term, because the fact is many of these companies will find that it’s not just a liquidity problem, it is eventually a solvency problem. If a lot of companies are not able to survive, then when you get to later in this year or even next year, you’ll have this million-dollar question of: how do you deal with these “zombie companies”? Do you keep putting money and letting using public finances to support companies or do less creative destruction happen ala Schumpeter. This is going to be a real challenge, particularly in the SME space around the world. I suspect this would be a big, big challenge next year.

CT: What does that mean for you exactly as a bank? How much of your loans to these smaller customers have the potential to turn bad? Have you made an assessment?

PG: It’s very hard to make that assessment because even today, three, four months into the crisis, it is difficult to forecast how sharp the recovery will be. It could be anything in the alphabet soup – a V shape, an L shape, a U shape or W shape. Because some of that is in the hands of the gods, it’s in the hands of the health side, it’s hard to figure out how quickly that recovery will kick in. However, I suspect that things will be worse than people predict. Therefore, in our own stress testing, we have taken some fairly draconian assumptions around the number of SMEs that are likely to be unable to survive, if not surface well.

CT: Do you have a number?

PG: No, we don’t have a number. In my last quarterly guidance, we gave an estimate to the market that we think that the scale and scope of the credit problems we might have over the next two years, between 2020 and 2021, could range anywhere between SGD 3-5 billion. In a typical year, it’s about SGD 1 billion. So, what I’m saying is that I could see challenges that are two to three times that I would normally see. But I have to tell you, this is not scientific and we’re going to learn a lot more as we go along.

CT: These bad loans, these non-performing loans, as you call them, is there a level within the bank that you’re targeting that you’re predicting that will happen?

PG: No, we do stress tests and some of this is, you have to remember, a function of country and it’s a function of industry. So, richer countries which have had the capacity and wherewithal to provide public financing support will do better. Singapore has had four rounds of budget. We got SGD 100 billion. We’re providing a lot of support to a lot of SMEs, but as you get to other countries with less fiscal space, you take India and Indonesia, you’d find the government can do a lot less in the short term. Therefore, you’d expect to see a lot more damage in the corporate sector as a consequence of that.

There’s also a difference by industry. If you have large exposures in energy, in tourism, in hotels, those exposures and those companies are likely to suffer more. If you’re exposed in other parts of the spectrum – companies who are advantaged by work from home, digital companies and so on, you are likely to suffer less. So, it’s a bit of a mixed bag.

CT: Let’s pick up more on that. All that uncertainty leading to concerns about a rise in non-performing loans, where do you see the bank’s NPL? Could it reach levels last seen in 2009?

PG: I think it certainly could. In fact, I think overall the banking sector – NPLs, provisions and defaults around the world could get worse than you saw in 2009. It’s not impossible. Right now, that looks like a sharp rebound in many markets. My own suspicion is that a) it has benefited by a comparative effect. Things got so bad in April, May, that anything from that looks better.

I do think the recovery is going to take time and be long drawn – a U-shaped recovery if you’re lucky. And like I said before, I think a lot of the liquidity challenges will become solvency challenges. In Singapore, for example, come January 1, companies will have to start being principals, they have to start paying interest, households will have to start paying interest. If unemployment hits what people predict – 200,000 jobless, and if GDP and PMI are as negative as we expect, I think it’s going to create a much bigger extent of damage than people are currently positing. So, I think it could be worse than 2008, 2009.

CT: So, it’s a difficult environment out there, with potential to be even much worse. What sort of provisions are you taking in the meantime at DBS to cushion some of the increased credit risk and potential losses you might be facing?

PG: Well, first of all, you’ve got to remember, the banking sector is approaching this crisis much stronger than it was in 2008, 2009, and partly because of the regulatory reform agenda that’s helped banks to have much more capital. In our own case, our total capital called Tier One capital is well worth 13.5%. So, we have a lot more capital buffers that we can dip into. We’ve also, in our case at DBS, built up a lot of reserves.

We have general provisions available with SGD 3 billion. In the first quarter, we took an additional SGD 700 million dollars, not because we knew what was going to come, but because you’re pretty sure something will come. So, we’re trying to pre-position ourselves and build up buffers ahead of time. We, like a lot of other companies, stopped doing any share buybacks, that was also an effort to preserve capital. As things go on the course of the year, we said we will have to potentially review our dividend policies depending on how bad things get.

I think the biggest and most significant thing that’s happened for us is actually not just the slowdown in the economies that obviously matters, but the consequent actions taken by the central banks, which has effectively driven interest rates down to zero in most parts of the world. The Fed is at zero. The Fed did unprecedented cuts. On the back of that, in Hong Kong and Singapore, interest rates are down to historic lows. Now, certainly for us at DBS and for most banks, a zero interest rate environment means you start facing extraordinary headwinds from an income standpoint.

CT: So, where actually do you see the recovery then? How long could it take?

PG: I think some of it is relative. As I said on our quarter-on-quarter comparison, year-on-year comparison, you start seeing a rebound. I think third quarter numbers will be much stronger than second quarter, for example. Fourth quarter, I think, will hopefully be stronger than third quarter. But if you look at a year-on-year comparison, I don’t see any year-on-year recovery into 2020. So, we’ll have to wait till 2021, which again will start benefiting from a low base year in 2020.

I do think that domestic sectors of the economy will start recovering only because most countries have started opening up, whether they have control of the pandemic or not, because they don’t have a choice. I think cross-border sectors, whether it’s travel, tourism, the hotel industry, airlines, I don’t see that coming back for an extended period of time.

CT: So, are we looking at a multi-year recovery? And if that is the case, could it trigger another financial crisis?

PG: You will see more stress on the financial system in the later part of this year and next year, without a doubt. I think central banks played a fantastic role just by opening up the playbook from 2008, 2009 – loosening monetary policy, doing QE infinity which is what’s now called on the fiscal spend – all of that has been good. But in truth, I think that’s only buying time. It’s kicking the can down the road. Sooner or later, the consequences have to be felt in the financial system.

One of the big challenges of all of the actions that were taken, mind you, I think these are good challenges, good actions we had to take them, but one of the challenges it creates is the challenge of moral hazard. The challenge of moral hazard, as I said before, is we have taken care of individuals and companies, whether they are deserving to be taken care of or not, whether they really have a business model which is robust and resilient for the long term. When you start doing that, you create a situation of heads I win, tails you lose. It’s like the eternal fed poll. So, companies are doing that today. Now, no country can afford to perpetuate moral hazard into the future. Therefore, when you get to a second round, politics will make it difficult, civil society will make it difficult. People will say you can’t keep bailing out companies. You can’t be bailing out the private sector, somebody’s got to pay for this. So, I do think you’ll start seeing a lot more selective support next year, which means that you’ll start seeing a lot more defaults, which in turn means that you’ll start seeing the problems spill-over to the financial sector.

CT: So, in short, are you bracing for a financial crisis next year?

PG: It depends on how you call a financial crisis. If you ask me, are you looking for far more damage to banks and bank balance sheets next year? I’d say the answer is yes. If you ask me, do you get to a situation like 2009 where banks need to get bailouts and wherewithal capital? I think the answer is no. I think most banks are fairly well capitalized and I think they have the wherewithal and the financial muscle today to be able to take on a lot more pain than they were 10 years ago.

CT: Could it trigger a round of consolidation in the banking sector?

PG: It could, but again, based on my view that banks have a lot of capital, so the bigger challenges are going to be in the real sector and not the banking sector. I would be surprised if a capital shortfall would lead to another banking consolidation.

However, one thing is happening for sure, that is changing the game and that is the digital activity. As more and more customers are going digital and COVID has only a dramatically accelerated that, then you start finding winners and losers in respect to the banks who can cater to this new digital world and banks who can’t. So, if there is likely to be a consolidation, it might be driven not from the capital prism, but more from the capability prism. Banks who are able to handle the new digital economy better will survive, those who are not might eventually lose out to fintechs, non-banks and other banks who can do this job better.

CT: This pandemic has really triggered a huge discussion on whether banks should continue their dividend payout. While HSBC, Credit Suisse, UBS have said that they’re going to suspend their dividend payouts. Can you clarify your position?

PG: I think most of the banks who have suspended the dividend didn’t do it voluntarily. They did it because they were nudged or guided by the regulators in the respective markets. HSBC was quite vocal, if it wasn’t for the regulator, they would have paid their dividend. Similarly, the Swiss banks and so on. So, I think it might be premature for regulators to mandate dividend cuts when we still don’t know the scale and size of the impact.

Let me remind you, I said banks are well capitalized. Banks have a lot of buffer and cushions. At the end of the last crisis, we established a protocol along with the regulators in the Basel format, which allowed us to keep extra capital buffers, counter-cyclical buffers which we dipped into before you get to the stage of having to attack the dividend or cutting back on capital. My view was we should go down the protocol that we agreed as opposed to being precipitate and front-ending the dividend cuts before we even know the scale and size of the damage.

Now, my response to you about us being open to looking at our dividend is something which is consistent with what I said earlier, that if you think the situation is going to get so bad as we go forward with the next 12, 18 months, that we need to conserve more capital than we have, then of course, we will go back and reconsider dividend.

We made the statement again in our first quarter guidance that we pay dividend every quarter. So, every quarter we would take stock and see how bad the damage is and what is the impact on our stress capital positions, then we’ll take some views on what we need to do with our dividend policy.

CT: So gut feel, looking at the next 18 months, do you think you might have to cut your dividends? Do you think it might be prompted to do so?

PG: I don’t see. Based on our case assumptions, I thought we figured SGD 3-5 billion of potential costs, we don’t need to cut dividend at those levels. So, two, three times the cost of credit, I think our capital base is robust enough to not have to go there. On the other hand, if you figure that this is a tail event and you wind up with even more damage and even bigger losses, then, yes, we would have to go back and rethink and revisit our dividend policy.

As you know, the Fed made the announcement. They’ve kept out of this so far. They guided the U.S. banks to think about the dividend policy in the context of the stress test; after which only one of the U.S. banks had to cut dividend. The rest of them were able to maintain dividend at the existing levels. Most of the regulators around the world have given some dividend guidance and MAS is one that hasn’t. So, it’s not impossible that they might also wind up coming up with some dividend guidance into the future. But frankly, that’s a question to ask MAS, I wouldn’t know about that.

CT: So, if DBS have to cut dividends, let’s just say, can we all assume that things have taken a turn for the worse then?

PG: Well, yes. Let’s put it this way, if we voluntarily cut dividends, I think it would be fair bet to say that we think the outlook is grimmer than we had originally anticipated. I think that would be a fair reflection. On the other hand, if the regulators take a view, then that doesn’t necessarily follow.

CT: So, as more countries, including Singapore, come out of a lockdown, what does that mean for DBS operationally in the new normal post COVID? Can we assume that 80 percent of your employees will still continue to work from home?

PG: I’m in the camp which says, well, theoretically, 80 percent could work from home, I don’t think that will happen. I don’t think that would be good for companies, because when you work from home, you worry not just about short-term productivity, which has been extremely good, you have to think about long term consequences of things like morale, of culture, getting people psychologically charged up to be part of a group and a team, new hires and how do you indoctrinate them?

There are a host of other dimensions that we need to think of, not to mention the proverbial water cooler talk, the power of serendipity in creating ideas. So, unlike a lot of other leaders who have said this is the end of the big office and nobody is going to come into big buildings ever again, I am not in that camp. I do think what will happen is that you’ll be able to create a lot more flexible working for employees. But I still think the core of all of the future of work will still be large complement of people aggregating together in common spaces.

As we bring people back, we’re using the opportunity to experiment a lot so we can learn what works best. We’re trying hub and club system, so smaller central force and more distributed workforce offices. We are getting more flexible work systems – four day working, alternate day working. We’re trying to figure out which jobs are more amenable to long term work from home and which are not. If I had to guess, I would say that you would probably wind up with 70, 75 percent of the people back in office, and about a quarter of the people staying away from office at any point in time, being able to maximize their flexibility.

CT: You have more than 12,000 people working for you, and you’ve actually come out to say that you are not going to undertake any layoffs. In fact, you are still hiring. As a state-owned bank and a key employee here in Singapore particularly, are you trying to set an example to lead the way for others to follow?

PG: My belief is that one of the biggest challenges we’re going to see is the challenge of jobs and joblessness. There are some 30, 40 million people out there, 20 million people unemployed in the US. There are some 70, 80 million migrant labor who went home and then don’t have jobs today. I think the forecast in Singapore is a couple of hundred thousand people. So, I think creating jobs is going to be the biggest challenge for governments and society.

Governments can’t create jobs. Governments can create enabling conditions for jobs, but jobs need to be created in the private sector. Therefore, for large employers and large companies like us, the best thing we can do is to help create those jobs.

Ed. This transcript between DBS Group CEO Piyush Gupta and CNBC Journalist Christine Tan has been edited from the original transcript, provided courtesy of CNBC Managing Asia. Featured image provided courtesy of CNBC.


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