DBS Group Holdings Ltd
SGX:D05
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
26.9685
43.02
|
| Price Target |
|
We'll email you a reminder when the closing price reaches SGD.
Choose the stock you wish to monitor with a price alert.
This alert will be permanently deleted.
DBS Group Holdings Ltd
You don't have any saved screeners yet
Okay. Good morning, everyone, and thank you for joining DBS' First Quarter 2020 Financial Results Year Call. In this call, our CEO, Piyush Gupta and CFO, Sok Hui Lim will share about the first quarter, both how we've been navigating COVID-19 as well as key financial highlights. We will also be sharing about what we see as outlook going forward. Do note that the slides that they'll speaking to can be found on DBS' Investor Relations website, which you may like to refer to. So after the presentation, we'll be happy to take your questions.
Without further ado, Piyush, please.
All right. Good morning, everybody, and thanks for calling in. These are challenging times. And the way we're going to do this is I will speak for a few minutes on the COVID-19 crisis and how we're navigating it. I will then pass on to Sok Hui to take you through her deck, which is a look back at the first quarter. And then we will come back to my comments on the business outlook, credit outlook and dividend. So you have to, unfortunately, flip across 2 decks from our site. The first 4, 5 slides, is my deck first, refer to our COVID-19 situation.
Let me start first by acknowledging this immense crisis. In a sense, it's a human tragedy, and our hearts go out to all the impacted people. As I will cover briefly here, we at DBS are trying to do our best, whether it is for our customers, our employees, the community at large. I think it's incumbent on us and all large corporations to do these in these difficult times.
But perhaps, I'll start off by recognizing first, most of all, our own employees who've been truly heroic over the last 6 to 8 weeks. And if I take you to my first slide, Slide 3, that really underlines why I think our staff has been just extraordinary because the truth is our business volumes have been very strong. Now this is contrary to a lot of other industries' services sectors that also got impacted.
In our case, our corporate banking volumes are up 10% year-on-year. That reflects our custody volumes, cash management and payment volumes, even part of trade finance, even account trading volumes that we have. On top of that, of course, all the relief measures that we have to process, so those volumes are up. The consumer volumes are a little bit down, principally reflecting cash and branch closures. But even in the consumer space, there are other areas where volumes are holding up. And once more, because of all the relief measures we are doing, we need to be able to process that as well. On the treasury side, volumes have been strongly up. They're up 20%, 25% for the quarter.
So overall, the volumes for us in this quarter have actually been up. And frankly, even though working from home is now a byword we've had 0 loss of productivity. What that means is we're handling the higher volumes with no backlog, which obviously suggests that productivity is keeping up. So I'm really pleased about that.
Like everybody else, we are essentially working from home to a large extent. Our bank relationship managers are pretty much all at home, over 90%. Our traders are about 70%, 75% at home. Some need to come in. But everybody else trades from home. We're recording their orders and remote recording and so on. I am most pleased that technology staff, 99% of our developers are now being -- working from home development activity. Some production support activity in Singapore people come in, but this has been extremely well organized.
The biggest -- a lot of our people who still need to come into work are the operation staff, and that's because there's still a lot of people handling in areas like mortgages or, like I said, the branches. You have to be in the branch to open the branch, for example. But net-net, the remote working has been extremely smooth. We haven't missed a beat.
Also, our digital banking capability, digital capability has served us very well. Even in the first few days of the crisis, our team was able to come up with some fairly nifty applications, which have proved to be very beneficial. So for example, contact tracing. Immediately after we had our first case of virus, within 24 hours, we have developed our own contact-tracing application using artificial intelligence, using cell site data, using Go.Data, using WiFi data. So we can, at any point, identify 1 degree of separation, 2 degree of separation, 3 degree of separation, quarantine the right people and so on.
Similarly, we've created apps using sensors to be able to track flow loading at any point in time. So we know exactly what is the capacity and utilization in any floor that can facilitate the social distancing and so on. So a lot of our capabilities are helping.
And finally, we're doing all this while dialing up the cybersecurity framework. Obviously, when you put more people working from home, you create a higher level of risk. But we've been able to handle exponential increases in work-from-home volumes, VPN,VDI, Citrix capability, lag defense capability. We've also dialed up manual control. So we have a review process on the day after. We have a tightened network command center, which has beefed up its capabilities and so on. Bottom line, the key challenge for us is, like everybody, is right now more a psychological challenge than a real challenge. We've been able to operate quite resiliently.
If I can take you to Slide 4. It also tells you that in addition to getting the staff done, we are also being able to work through large bodies of people and keep the rest of the engagement activities going. So we've done over 50 town halls. And normally, we do town halls in person. We've been doing virtual town halls. We've engaged over 20,000 staff in these town halls. That's working very well. Like every other company, we're doing virtual meeting. We did 1.2 million virtual meetings in April. That's over a 9x increase.
The bottom left, I want to point out that we are also have projects that continue at pace. So we haven't had to slow down. So we ran over 30 virtual workshops. These are half-day, full-day workshops with large numbers of staff and a lot of that is to support project activity.
And finally, all our learning and development is also continuing at pace. We moved over 100 training courses online and conducted them in the last month with over 15,000 people. So in addition to being defensive by getting the job done, we're also being able to actually keep the normal bank running quite well.
If I take you to the next slide. In addition to what we did for our own residency, we've been very focused on trying to make things easier for our customer base. As you know, we already have a whole slew of digital capabilities out. But in this last 2-month period, we have really accelerated several rollouts we planned through the course of this year. And in some cases, we have created short cuts to add some more that weren't even on the agenda.
These include the capacity to open accounts at scale, so particularly equity accounts, migrant worker accounts. You see at the bottom, we opened 24,000 equity accounts in less than a month. This is more than 1.5 years’ normal quota. We also opened 35,000 accounts for migrant workers in less than 2 weeks when the migrant worker problem hit this thing. And that's obviously because of our capacity to be able to launch digital account opening.
We've also increased our capability to accept documentation to things like secure mail. Now earlier, our interaction used to be on fixed formats. Now we've got secure mail, which take people's instructions off. We enabled tele-advisory. So all of our financial planning is now happening online in a virtual tele-advisory space. We've created guided chatbot for being able to handle all of the questions around corporate and relief measures from the government and from our own [ self ]. And in fact, we've also made sure that all of the relief measures applications can all be made online real time.
So you know now the whole slew of activity. And if you go to the next slide, Page 6. And it will tell you the impact of this is actually quite visible. So if you look at equities trading, between the fourth quarter of last year and the first quarter of this year, our total volumes have more than doubled. In fact, our fee income between fourth quarter last year and this year has gone up from $15 million to $35 million, which reflects the amount of online activity that people are doing and all of the new accounts you opened and so on.
If you look at the next one on the right, on foreign exchange, our volumes are up 50% year-on-year. If you look at the bottom 2 domestic payments in Singapore, both PayLah! and PayNow, our volumes are up quite significantly. And the last column on the right, corporate PayNow is actually up 6x as more and more SMEs and companies are willing to accept online payment.
In all of these categories, our volumes are up and by and large, from what we can tell, our market shares are up as well. So it's been quite helpful to our customers but also continue to buttress our own business volumes.
If you go to Page 7. Just a quick overarching thing. We've been trying to do stuff across the board. So column 1, for our own people, we went public announcing that we would not retrench anybody in the course of this pandemic through the year. In fact, we're not going to cut salaries. We, in fact, actually judiciously hiring. We think it's helpful for the communities to continue hiring. And we are hiring graduates, interns, trainees and so on, albeit in a major way. But we think the kids coming out of school at this point in time need some support as well.
We've created medical teleconsultation capabilities for all our staff, so they don't need to step out of the house to get ordinary consultation. We've launched this whole wellness campaign we call TOGETHER to keep people's spirits up while working from home. There is a whole bunch of different things like monthly challenges, games, deep learning and so on.
In terms of the government packages, so far on the consumer front, we've done over -- almost close to 8,000 principal at interest deferrals for mortgages. This represents almost $5 billion, $4.7 billion, of outstanding loans. We launched free insurance for COVID with our partner, Chubb till the end of April. And so far have been able to insure 1.2 million customers and families.
On the corporate side, again, we've been doing loan moratoriums. We've done over 1,800 loan moratoriums, representing, at this stage, about $3.4 billion in total loan outstanding. We've also been able to avail of the new government bank in Singapore, the ESG loans. So far, we've raised $3.2 billion loans under the government relief program.
And finally, a couple of weeks ago, we launched a new fund. We've allocated $10.5 million, so what we call the DBS Stronger Together Fund. It's across the region in our 6 main markets, helping wonderful communities like the elderly, like the migrant people, helping with test kits, helping with medical facilities in each one of those markets as well. So I just wanted to start with this, that it is a big crisis. It is a tragedy for many people. We do believe we have a role to play, and we have been very focused on trying to do that. But at the same time, we've been trying to make sure that we can continue to run a resilient business and be there for our customers at this critical time.
With that, let me pass on to Sok Hui. She will take you through the results for the quarter.
Good morning, everyone. The group achieved a strong first quarter performance as total income rose 13% or $475 million from a year ago to cross $4 billion for the first time. Net interest income, fee income and other noninterest income all recorded increases year-on-year, growing by 7%, 14% and 39%, respectively. Net interest margin was stable on the quarter at 1.86%.
Expenses were well managed, declining by 3% from the previous quarter. Cost-to-income ratio improved to 39%. Operating profit before allowances rose 20% from a year ago to a new high of $2.5 billion, which allowed us to preemptively set aside $700 million of general allowances to fortify our balance sheet against risks arising from the ongoing COVID-19 pandemic.
The charge increased the amount of general allowance reserves by 29% to $3.23 billion or 1.08% of assets under regulatory definition. With the buildup of general allowances, first quarter net profit declined 29% to $1.17 billion. The NPL rate rose to 1.6% from 1.5% the previous quarter. Allowance coverage of nonperforming assets was at 92%, and allowance coverage of unsecured, nonperforming assets was at 173%. Liquidity is healthy.
Deposits recorded their highest quarterly increase of $30 billion, rising 7%. The loan-to-deposit ratio declined from 89% in the previous quarter to 83%. Both the liquidity coverage ratio of 133% and the net stable funding ratio of 112% were well above regulatory requirements. The common equity tier 1 ratio of 13.9% was above the group's target operating range of 12.5% to 13.5%, and well above the regulatory requirement of 9.1%.
DBS on Slide 3. DBS delivered solid franchise growth in the first quarter, as you can see from this chart. Total income grew 13% from a year ago to cross $4 billion for the first time. Business momentum was healthy. Net interest income rose 7% or $172 million from a year ago to $2.48 billion on the back of broad-based growth in nontrade corporate loans and stable margin.
Fee income rose 14% or $102 million from a year ago to a new high of $832 million. The growth was led by a 28% growth in wealth management fees, a 17% rise in loan-related fees and a 64% increase in investment banking fees as clients set up debt issuances. Other noninterest income rose 39%, from gains on investment securities and from strong treasury and market activity as customers put on more hedges and structured trades.
Expenses were well managed, rising 4% from a year ago. Profit before allowances grew 20% from a year ago to $2.47 billion. Total allowances of $1.09 billion were taken to accelerate the buildup of reserves and add resilience to the balance sheet. 2/3 of the amount of $700 million were for general allowances. The remaining $383 million was for specific allowances. More than half of the specific allowance charge for the quarter was for new nonperforming loans.
Net interest income increased 7% from a year ago and 2% from the previous quarter to $2.48 billion. Loans grew 1% in constant currency terms from the previous quarter. Net interest margin was stable from the previous quarter to 1.86%. Although the U.S. Federal Reserve cut policy rates to near 0 in March, LIBOR interbank rates were resilient due to stressed funding market conditions. This served to buffered net interest margin. We expect net interest margin to come under some pressure in subsequent quarters as rates decline in line with globally [ accommodated ] monetary policy and improved funding conditions.
Slide 5. Loans were 1% or $3 billion in constant currency terms from the previous quarter to $375 billion. Nontrade corporate loans grew 5% or $10 billion. Growth was led by drawdowns in Singapore and Hong Kong for CapEx and acquisition financing as well as for liquidity management. Trade loans and wealth management customer loans declined from the previous quarter. Loan pipeline remains healthy, and we expect further drawdown of nontrade corporate loans in the next quarter.
Slide 6. Liquidity remains healthy. Deposits recorded the highest quarterly increase, rising 7% or $30 billion in constant currency terms to $445 billion. The majority of the growth was from corporate customers. We benefited from a flight to quality and our strong deposit franchise enable us to weather the stressed market conditions in the second half of March when wholesale markets do not function well. As you can see from this chart, wholesale funding declined $6 billion during the quarter. We also hold high-quality liquid assets of $92 billion and debt [ from a marco ] definition, which further strengthens our liquidity position.
The loan-to-deposit ratio declined from 89% in the previous quarter to 83%. Both the liquidity coverage ratio of 133% and net stable funding ratio of 112% were well above regulatory requirements.
Slide 7. Expenses rose 4% from a year ago to $1.56 billion. Compared to the previous quarter, expenses fell 3% from lower general expenses and lower staff costs. There was a positive jaw of 9 percentage points compared to a year ago and 19 percentage points compared to the previous quarter. The cost-to-income ratio improved to 39%. We'll continue to exercise strong discipline in our cost management.
Slide 8. Nonperforming assets rose 14% from the previous quarter to $6.6 billion. 2 percentage points of the increase were due to currency effects. An oil trader accounted for a large portion of the new nonperforming assets. And the new -- and the NPL rate rose from 1.5% in the previous quarter to 1.6%.
Slide 9. Specific allowances amounted to $383 million. More than half of the specific provision charge was due to a single name, the same oil trader, which became nonperforming during the quarter. Credit costs were 35 basis points of loans for the quarter. This was 15 basis points higher than the 20 basis points recorded for 2019.
Slide 10. $700 million of general allowances were taken in anticipation of a deeper and more prolonged economic impact from the pandemic. The charge increased general allowance reserves by 29% to $3.23 billion or 1.08% of total assets under regulatory definition. As this exceeded the MAS minimum 1% regulatory requirement, regulatory loss allowance reserves are no longer needed. A portion of the general allowance reserve was also not admitted as tier 2 capital, pointing to a conservative and prudent level of general provision reserves as we enter uncertain times.
The total allowance charge of $1.1 billion in the first quarter was 6.2x the quarterly average for 2019. Including specific allowance reserves, total allowance reserves increased 21% to $6.08 billion, and allowance coverage of nonperforming assets was at 92%. Allowance coverage on unsecured, nonperforming assets was 173% after taking collateral valued at $3.08 billion into account.
Slide 11. The common equity tier 1 ratio was at 13.9%, little change from the previous quarter. The ratio was above the group's target operating range and well above regulatory requirements. The leverage ratio of 6.9% was more than twice the regulatory minimum of 3%.
Slide 12. The Board declared a quarterly dividend of $0.33 per share, unchanged from the previous quarter. Based on yesterday's closing share price, the annualized dividend yield is 6.9%. The first quarter interim dividend of 33% will be -- of $0.33 will be paid together with the fourth quarter's final dividend of $0.33. In total, $0.66 will be paid to shareholders on 26th of May 2020.
Slide 13, my concluding slide. Our record operating performance in the first quarter reflects resilience of our franchise and disciplined cost management. Allowances have been preemptively set aside to cater for risks arising from the uncertain pandemic outlook.
We start from a position of considerable strength. Our digital investments over the past decade have strengthened the resilience of our franchise. Our capital, funding and liquidity remain strong, and we are well positioned to support our customers in uncertain markets.
I hand you now back to Piyush for the next section.
All right. Thanks, Sok Hui. So if I can take you to Slide 8 of my deck. Let me give you a couple of seconds to switch back to my deck, Slide 8, and sales business outlook.
I think the first thing is, quite clearly, the strong first quarter has given us a head start for the year. Our income is up about $500 million from first quarter last year, and that's quite helpful. So at this point in time, we think that our overall income for the year could come in to about flat to last year's level, which means that the next 3 quarters, you will probably see a decline of $500 million, which will make up for the $500 million increase in the first quarter.
We do think that there will be, therefore, a slowdown over the next 2, 3 quarters. Not as robust as the first quarter. But that's not unexpected because first quarter included a very strong Jan and Feb, and you start to see some slowdown from March thereafter.
We're guiding for full year profit before allowances also to be flat to '19 level, which, therefore, means that we think we can hold expenses flat as well to last year's level. And I'm going to come back and talk a little bit more about that.
So what are the pressure points? The obvious pressure point is interest rates. The first quarter NIM, which, as you can see, has been surprisingly resilient, that does not really reflect the impact of the rate cuts of March. The spread dropped 150 basis points between the 3rd of March and the 15th of March. A, it was only the last 3, 4 weeks; and B, as Sok Hui pointed out, because of the funding conditions through the end of March, LIBOR stayed very strong. So the LIBOR OIS break went up to as much as 140 basis points through the end of March.
On top of that, we've actually been able to hold credit spreads. In fact, credit spreads have also gone up in this period because of uncertainty. So NIMs held up. However, the exit NIM through the end of March was already in the 170s. And therefore, there's no question that you will see some challenges on interest income.
We think NIM is going to be slightly volatile, partly because we have these government programs, which are low-yield programs. Even though they are good on returns because they're extensively guaranteed by the government, there's also going to be uncertainty around LIBOR levels and SIBOR and HIBOR levels. So it's hard to give specific NIM guidance. On the other hand, we think that the total impact of interest income is likely to be in the region of $500 million or $600 million for us in the rest of the year.
If you go to the next slide. While interest income and NIM will be a challenge, the interesting thing is the business volumes have been holding up. First quarter was particularly strong for nontrade loans. As Sok Hui pointed out, [ we do ] $10 billion. A chunk of that was obviously people drawing down on our revolver and the committed facilities for liquidity purposes, but that was not the majority of it. It's actually the minority of it. A large part of it continues to reflect business needs of our customers.
We're sort of [ monitoring this year ] how much of this is -- first quarter was the last hurrah. But as we look at our pipeline through the second quarter, those also look quite resilient. So still, I have visibility in middle of the year, the loan volume looks relatively okay.
Some of it is coming from real estate. There's still a lot of property transactions, both acquisitions and frankly, some development financing as well continues to happen. The TMT sector, parts of it are very robust. Companies which have switched to desktop, anything to do with support work-from-home kind of activity is strong. Data center activity is strong. Even at ECI, storage -- anybody in the storage business, they're actually doing quite well.
In a regional context, Taiwan is not missing a beat. China business volumes are holding up, come back in the last few weeks. And then it further helped a little bit because of the relief program. So as I said, we think we're going to do about $3 billion of incremental relief programs to support SMEs, et cetera, in the region. So that's obviously helped the loan book.
Finally, there is restructuring activities. When it was public, we are part of helping put a restructuring package for, example, for Singapore Airlines backed by Temasek and the government. Now that obviously, it winds up with some assets for us on our book. So the loan -- nontrade loan pipeline looks like it might hold up.
The trade loans are being impacted. I think the total trade volumes are down 10%, which shows up in our trade loans in the first quarter. I think that will continue. If you look at the overall projections of WTO, they're looking at trade between 13% to 30% down. We are not seeing 30%. We are seeing about 10% down around the region, but that's likely to continue. As you know, however, that the net interest impact of that is not that large because the margins on the trade loans are oftentimes quite tiny.
On the housing and consumer loans, we expect a little bit of change. The housing loans in the first quarter actually grew. We are up by about a few hundred million bucks in terms of asset levels. First quarter was actually one of our strongest new booking quarters in a long time. We did $3.5 billion of new bookings. But the bookings have cracked. Obviously, in April, with the circuit breaker in Singapore, the bookings are down by about half. So we expect the loan volume to be flattish.
On the non-mortgage side, we saw some shrinkage in the margin financing. We had financing loans, a couple of billion in the first quarter, even though activity was robust. But as we go into April, we think that level will probably hold. So on the asset side, like I said, we put all of that together. It is -- resilient is the word we've chosen to use.
On the deposit side, Sok Hui pointed out to you that we just had a massive inflow of deposits in the first quarter. Frankly, it's continuing into the second quarter. And so that reflects not only people going down and leaving money with us, it reflects IT, digital activity and operating account activity; also reflects some -- on the consumer website, people trading out of investments and putting money into deposits and so on, but that's likely to be strong.
Our fee income, I think, might be somewhat lower because the first quarter was really benefited by a very stellar wealth management performance. We had over $100 million of incremental fees in wealth management. Our loan fees also held up. Our bond fees held up. I don't see the wealth fee income staying at these levels, so that will be a headwind.
On the other hand, we do have diversified fee income sources. So the investment banking, I think the markets are beginning to open. We've done a slew of new issuances. In fact, investment-grade issuances globally through April have been some 50% higher than last year. And we are holding share. Our lead table positions actually have improved quite nicely in this 4-month period. So we think the diversification of some of our fee income sources should help.
The big upside is obviously in the noninterest income category that shows up in the first quarter as well, and that comes in 3 parts. One is our customers are all being a lot more active in risk management, hedging, exposure management, both on the corporate and the consumer side. So that's helping our strategy and market sales activity. Second, the market business itself has been able to do well in this volatile environment. So that's been a positive. And third, we obviously, like a lot of other players, have a large portfolio of investment securities. And with the collapse in rates and the yield curve, a lot of those investments are well in the money. So we have been able to take the opportunity to monetize some of that, and that opportunity continues to exist as we go through the year.
So when you look at all of this, I think our assumption that we might be able to hold income flat this year is attainable. As we look into '21, it will be a little more challenging because you're going to see even further impact of the interest rate environment. On the other hand, the outlook for '21 is quite unclear. We do see a sharp pick-up in economic activity from low levels this year of recovery into 2021. That will obviously be helpful, but it's harder to call than the rest of this year.
Heading to Slide 10. On expenses, as we indicated before, we've been -- we have some flexibility with expenses, and we've tried to be quite deliberate and thoughtful on our expense management already. We don't want to retrench anybody or cut people's salaries in these difficult times. We think it would be the wrong thing to do, in particularly with the workforce, which has been, like I said, making such a heroic effort. However, we have become a lot more judicious about our hiring. And so to the extent that we do have some turnover, which, by the way, is very small in this environment, we'll be careful about replacements and incremental hiring.
We've been able to cut back on a lot of discretionary nonstaff expenses. Travel is an obvious one. Nobody is traveling, so we don't have to do too much to get that. But the other expenses were around marketing, around consulting, around a whole bunch of discretionary things. We've already tightened the belt on some of those.
We have prioritized some of our investment spend, and we will do that. It's not a huge lot, but we do have some capacity, as we've indicated before, to prioritize that. We're doing some of that.
And finally, while we now wouldn't impact base salaries, obviously, variable comp will be aligned to earnings, and that will flow through in the course of the year. So on the back of all this, we do think that we should be able to hold expenses relatively flat as well.
If I move to the next section, away from business outlook. So I'm going to the credit outlook because obviously it's a big driver of the bottom line over the next couple of years.
Let me just first start by refreshing you what the nature of our loan book is. This is an actual -- a loan outstanding. This is not our actual percentage outstanding because it does not capture, for example, contingent liabilities. So our total outstandings would be some 10%, 15% higher than this. But this, folks can reconcile to the loans you see in our performance, some of it in our balance sheet. So it's a good way to understand where we think our portfolio exposures might be.
If you look at the overall loan book. As you can see, our consumer loans of $114 billion is about 30% of the book. SME of $39 billion is 10% of the book. I've carved those out because, generally speaking, in these kinds of macroeconomic crises, these 2 segments tend to be more vulnerable. So I will take you through those in a bit.
The rest of our loan book is large corporate. Out of the large corporate, we've identified 8 or 10 industries, which I'll talk to, which we see as more vulnerable or more likely to be impacted. The total loan outstanding total for those industries is $46 billion. Out of which, about $5 billion is Singapore Inc effectively. So we think that's actually relatively okay in that sector.
If I take you to the next slide, Slide 12. Overall, there's no question that we expect credit cards to rise. Already, the damage that's been done to the global economy is large. The first quarter GDP number from China, negative 6.8%; U.S., 4.8%. Those are very material. So we do think there's going to be a pickup in credit costs without a doubt.
We think this pickup in credit cost will be -- we'll try to dimension it over 2 years. Now the reason we think 2 years is that because of all the relief packages, it is kind of unclear what you will just see in 2020. Because we're not asking people to do principal or NPL servicing on mortgages this year, then obviously, nothing goes into delinquency and to NPL. Similarly, we think principal deferment for a large part of secured SME loans, so that doesn't go into NPL either.
And therefore, we think the right way to think about what is the potential cost of credit is to factor in a 2-year view, which means once the moratorium, the relief packages get over, you will expect to see some of these loans turn back. So we were trying to take a longer-term view looking through the moratorium.
And when you look at the longer-term view, we estimated that we could see cost of credit in the $3 billion to $5 billion range. It's somewhere between 80 and 130 basis points. We used actually period methodologies to come up with a number. We did a top-down view, leveraging our models and top-down portfolio migration analysis, macroeconomic variables and so on. We did a bottom-up, which is actually name-by-name, each sector, vulnerable sector, doing a stress test and et cetera.
We really looked at 2 scenarios: one which we call the base scenario, which is that all lockdowns basically continue in all major economies, most of the world, through -- till the end of June and then you start progressively seeing opening up. You will see a gradual recovery towards the second half of the year and muted growth next year. A good way to think about this scenario, we assume that there's a 20% correction in stock price levels around the world in this scenario. Now it's not a general, but that's a good way to think about it.
In the second scenario, we assumed a more severe scenario. We assumed that lockdowns continue into -- well into the third quarter. You see a recovery only at the end of the year, and economic activity next year is still materially lower than last year's levels. And a good way to think about this scenario is we assume basically that the stock markets are running at about 50% of last year's level, which would be fairly severe.
Now one thing to point out that in our scenario -- the stressed scenario in particular, our results of the stress are comparable to both SARS and to '08-'09. And we spent some time trying to think about why that would be because in 2 or 3 things that the magnitude of this crisis is likely to be more than '08-'09 or SARS.
So first, it's quite clear that even in our stressed scenario, there could be tail risks beyond that, and I would point them out as we go along. So it is possible that we've not factored in all the tail risks. It could get much worse. So let me acknowledge that first.
The second reason for a difference in '08-'09 is we went back and looked at the nature of our problems, the -- a large part of that came from our Middle East exposures, chunky Middle East exposure, where we participated in large syndicate loans. And actually, if we didn't have that, then the nature of our problems would have been far shallower. So it's not really comparable from that standpoint.
And if you look at '03-'04, we actually were hammered a lot by the Hong Kong bankruptcies in that period. There were very large bankruptcies in Hong Kong. Our consumer portfolios were a lot more vulnerable. Our mortgage lending that time were more than 100% loan to value, 103%. And the credit bureaus are not that very developed.
And so again, it's hard for me to say whether it's just that we're not being severe enough. The situation could get worse in the period. If it could be, I'll point it out. But I think there's good reason to figure that the actual overall nature of the stress might be similar to those 2 periods in our overall business and our portfolio.
So I take you to Page 13. A quick look at the consumer portfolio. So our loan size, as you know, is $75 billion. And actually, in our sets, we are still expecting minimal losses, expecting our losses to be not more than the '08-'09 crisis. So let me point that, that's the first tail risk.
The reason we think our losses are going to be quite muted is the next 3 bullet point. One, that the regulations on loan-to-value and debt servicing have been very prudent. The Central Bank has been very, very tight and has continued to tighten the amount of financing you can provide. Our LTVs on new to bank originations are generally 70% or less. In a handful of cases, they go up beyond 70%. The TDSRs, total debt servicing ratio requirement of 30%, meaning you just cannot give loans to people who are overly indebted. And as a consequence, we think that the actual ability of people to service and pay is actually quite good.
Our loan to values are very, very conservative. In Singapore, the portfolio, I told you, through the [ 270 ], the portfolio is at 55%. The loan to value in Hong Kong is even more conservative. It's at 32%. So you could take a sizable collapse of property prices and you would still not have negative equity on your collaterals.
And finally, as we pointed out before, the vast majority of our loans, 85%-plus, are for owner-occupied premises. They're not investment kind of properties and also creates a degree of resilience in our housing loan portfolio.
So as a consequence, if you look at the last 7, 8 years, from 2012, our losses on mortgages have been 0 and -- 0. So now as we project forward, we're obviously projecting some pickup in basis points, but the net total of it is not very material.
On the unsecured credit, I think the main thing that we've benefited by is that our unsecured credit book is very tiny. It's 3% of our total loans of $11 billion. I was looking at the results of the American banks, for example, JP and Citi. Their credit card portfolios alone are over USD 150 billion. So you're talking about 40x our credit card portfolio. And because unsecured books are very tiny, this segment, which is normally the segment that worries most -- in fact, a large part of the provisions created by the U.S. banks are in support of this book. Now for us, this book is so tiny that it doesn't move the needle very much.
In addition, again, in Singapore at least, the MAS has been tightening the borrowing conditions for unsecured credit activity over the last 4 years. Our balance to income has progressively been reduced from what used to be unlimited then to 24x, then to 18x, then to now 12x. So all our balance to income has been brought to 12x for the whole industry. And that means that the riskier segments of the market don't exist on our books anymore.
That -- on top of that, Hong Kong region has already been under stress for the last 12, 18 months, has been through a little bit of a wringer and we've been able to see the impact on our Hong Kong book, which is obviously smaller. Singapore is more than half of this book.
Next then, nevertheless, we are projecting a pickup in provision of between 3 and 4x our normal levels in this book. But when you add all of that together, the entire consumer portfolio does not create total provisions of more than between $0.5 billion and $1 billion, depending on which scenario you look at. So it's relatively manageable.
You go to the next slide on the SME book. As I pointed before, it's a $39 billion book. 90% of that is in Singapore and Hong Kong, and it is predominantly secured against property. Now that is -- I point you in the first case. The tail risk is that assumptions on mortgages go wrong, and there's a massive collapse in property prices of more than 50%. That is the same tail risk in the SME sector. If there's a massive collapse in property prices and property prices collapse by 30%, 40%, shophouse, et cetera, there are loss-driven default assumptions on this portfolio could come under some pressure.
However, even for this sector, we have been tightening our lending in the last couple of years. Only 10% of our exposure is in, what I call, the troubled sector, hotels, F&B, retail. We've been tightening that down, and we've brought that down quite actively in the last couple of years. The Hong Kong portfolio, again, in this sector has gone through prolonged stress, has been under stressed conditions for the last 12 to 18 months.
And so when we do a name-by-name and portfolio analysis of this sector, again, we see provisions went up at 3, 4x. But even in the stressed case, they stay a tad under $1 billion of provisions as well.
If you go to the next section, the large corporate. I told you we identified industries we think are more vulnerable. That includes obviously oil and gas with the oil prices; aviation, nobody is flying; hotel, the gaming and cruise ship industry; tourism; retail; F&B; and shipping. Total loans is $46 billion, of which the biggest, half of that is in oil and gas, that $23 billion. I'm going to take you through that in some more detail.
For this sector, we did an even more thorough name-by-name analysis review based on stress assumptions. And we chose stress assumptions for every industry. In oil and gas, we've taken $20 oil prices over the course of this year. In aviation, we've assumed that there's 0 revenues for the next 12 months and so on. So we're taking some very stressed conditions, which are idiosyncratic to each of the industry.
In every case, we've tried to assume that they have 0 flexibility in expenses, that they have a fixed cost structure, so we kept expenses as they are. And then we have tried to identify what is their net impact on their liquidity, the EBITDA, cash flow, who's likely to get vulnerable and go under. And on doing that, through that basis, we have identified about 20% of these names needs to be flagged or closely monitored.
So I take you to the next slide, Slide 16. So that gives you a feel for the oil and gas portfolio. This is a similar chart that we used to show you in 2016 and '17 when we did the -- when we had the offshore marine crisis. We have about $7 billion to, what we call, the producer segment. Now these are mostly oil majors and state-owned companies. And those are people like CNP, [ CO ], NGC, Sinopec, DPC. This is the bulk of their exposure.
In the processors category, there are 2 big kinds: the refiners and then the storage companies that are doing storage. Obviously, anybody who's in transport and storage is benefiting dramatically from the drag in oil and the exponential increase in the storage prices and costs. So they're doing fine.
In the refining sector, refining margins are under some pressure. But again, our exposures tend to be to the oil majors or to integrated operators with large, diversified income. So this would be people like the Reliances of the world, et cetera, or BPs. So we think they're relatively strong.
If I take you to Slide 17. On the traders, we have a total of $5 billion. 50% of these are against bank letters of credit. So the export letters -- export business, we discount against bank letters of credit. Of the balance, we already recognize one loan as NPA. Everybody knows what that is.
In point of fact, there's actually a bit of an aberration in our book. It's obviously a large oil trader. And this -- from what we can figure, there's been an extended accounting [ fraud ], which goes back several years. The balance of the loans in the traders are to global traders or to state-owned companies, and they're very tightly -- generally tightly structured.
And finally, the last category is support services. As you know, our exposure in support services to the Singapore offshore marine sector is about $8 billion. This now has come down to about $4 billion. Out of the $4 billion, $3 billion is in nonperforming, $1 billion is not.
This sector, we think, will still come under more pressure at current oil prices. So we think we will -- even though we were conservative in our recognition of our losses in 2017, we think we might still have to take more provisions against some of those names. And then the relative portfolio might also come under some stress. So -- but that's probably still the most desperate part of our sector, but the component of that, which is not -- nonperforming and is performing, is actually quite small at this stage.
If you go to the next slide, Slide 18. On the aviation sector, we have total loans of about $6 billion. 15% of those are to Singapore Inc. It's not just the airlines. It's also the airport and so on we include in this category.
Another 35% are the national airlines. Now this is our third tail risk event. Our assumption right now is wherever the governments are providing support packages to the national flag carriers, and whether it's KLM or Lufthansa or Air France, that they will come through. But that is a tail risk. And that could -- something that -- depends on how the airline does, we'll have to wait and watch.
We have got 35% of exposures to bank-related and international leasing companies. A lot of these are bank-owned companies, the Chinese banks in particular.
And finally, the 15% of exposure to the aircraft manufacturers, which is obviously Boeing, Airbus, et cetera, and so on.
Now -- so on the aviation sector, we have made assumptions on the degree of government support in each category. We've also relied heavily on the liquidity and cash on the balance sheet available for each of these companies. If you take a look at the manufacturers, for example, do they have enough liquidity and cash to last them between 1 to 2 years. So we've taken that into account. But that obviously is a tail risk event, which could come to pass differently.
So when you put all of that together, between the consumer, the SME and the corporate, we come up with a range of estimates, which we think is realistic. Could be anywhere between the $3 billion and $5 billion-odd range over the next 2 years.
Moving on to Slide 19. Just a quick thinking on dividends. Now we obviously come to this crisis with a very strong balance sheet. So we pointed out that our equity core capital is still fairly strong at 13.9%. We do have general allowances of $3.2 billion. Of that, about $2 billion represents our models that's come up to a specific year and so on. But over $1 billion of that is just management overlays. So there's just a cushion we've built up and continue to build out to buffer us from uncertain times. And our liquidity positions are also very strong. So the balance sheet, we approach it from a position of strength.
So on Page 20. In reflection of all of this, keeping into account our current projection on earnings capacity, our projections on what our stressed situations could be and the -- going in, strong nature of our balance sheet, the Board decided to hold the dividend for this quarter at $0.33. We do think if our projections are in the range that we think about, our capital ratios will not dip significantly below our operating range.
Now as I say, however, there are tail risks, and the tail risk could come to pass. And therefore, we will continue to keep a watchful eye on our financial performance or the likelihood of stress losses as well as on our income, and we do that every quarter. Now fortunately, since we pay dividend quarterly, it gives us the capacity to keep reviewing our situation as we go along.
And so because there's uncertainty around how long the pandemic could last, there's uncertainty around what consumer behavior could be after the pandemic, there's uncertainty around the impact of the government measures and what that winds up with, so we will keep a watchful eye and keep examining our position every quarter as we go forward.
This is the end of my prepared comments. We are open for questions.
Aaron, we can take questions from the media. Please let us know if there are any.
[Operator Instructions] Our first question, Jamie from Business Times.
Sure. Thanks as well for a very comprehensive break down of the numbers. Just a couple of questions. Just about the large corporates. Is this -- when you look at the large corporate and the stress that we have, does it taking into account of the, I suppose, the domino effect, let's say, for landlords that are under stress because they are told to pass down certain rebates and are under pressure to ensure that they provide some relief for their tenants? How do you sort of assess the sort of domino effect that might have on the larger corporates in itself in this time of stress?
The second thing has to do with the oil and gas portfolio. I mean in the previous time in 2017, the write-downs, in some cases, were down to sort of scrap value. So can we get a sense of sort of the collateral values that you're looking at, at this point? And how much further markdowns are we looking at?
So Jamie, your first question is how we do our stress test, and that actually captures the domino effect. So for every industry, we come up with stressed conditions.
So you take an example of property. I don't have the numbers with me, but as an example, they would have made an assumption that property sector revenues fall by 30%. Now the 30% assumes that they have rent relief problems. They can't rent out their property, et cetera, et cetera. So that's already factored into that assumption on what this thing is. And so for every industry, they make an assumption on how bad the revenue situation could be that captures the domino effect that you're talking about.
And like I said, this is, unfortunately, an art and not a science. So you do put every name. You figure how much revenue loss there'll be. You look at what the expenses are. You look at what the liquidity and cash in the balance sheet is. You look at the refinancing, which are due in the next year or 2, et cetera. And then based on that, we make an assumption on are they likely to go into a default situation, are they likely to get very stressed and so on and work on that basis.
On your second question on the oil and gas, we actually -- in the last thing, we used a couple of variables. Where we thought there was no hope for the company, we actually went down to scrap value. Where we thought that the company could restructure or that there was a liquidation prospect, there's a buyer for the company, then we took liquidation values as well. So we had a range of different things we used.
In the current situation there, some of the companies who there were either restructurings in place for or there were buyers for, we might have to take that -- those to scrap value. The difference between a company which has liquidation value and good scrap value might be another 10% or 15% of what the levels are. But like I said, so there will be -- we could take some more hits over there, but it's not going to be extraordinarily large.
Our next question, Annabelle, please go ahead.
My question is specific to the wealth management business. I was hoping you would share some observations of client behavior in the first quarter. And in particular, are they like gravitating towards particular products?
So actually, the client base in the first quarter at this point are very strong. And I think that is because of among these 3 reasons. One is a lot of people were trying to sell and get out before the markets were listing and trying to move into cash. So we saw that, people moving out into cash.
But second, interestingly, a lot of people were also using the opportunity to reposition their portfolios. So people have actually taken views on long-term winners. Including in our discretionary managed book, they've given us money for what we call our barbell portfolio and so on. So people have actually tried to reposition into a range of different kinds of products. Equity in some sectors, not across the board. And similarly, people continue to go into some degree of structured products in some cases.
And the third reason I think the activity was strong is that people were all locked down at home. And so they're all sitting on their computers and figured they could do a lot more. Activity has slowed down in April.
So to be fair, I think some of this was obviously -- I think people have got a little bit more worried and a little bit more cautious and [ discovers ] that we've gone into April. So I do think you'll see some degree of slowness before people are willing to continue repositioning or going back into the market.
Our next Jenny (sic) [ Chanya ] from Bloomberg.
This is Chanya. Congratulations on the good numbers. I have 2 questions. From your gut feelings, what do -- when do you see a return to normalcy, at least in Singapore?
Second question is on oil and gas exposure. At $23 billion, how does that compare to the levels, say, in the past few years? Have you been trimming exposure to this sector? And what level do you see that going forward?
Okay. The first question, frankly, your guess is as good as mine. You need to be a scientist and an epidemiologist to call what would happen with the virus. I do take some encouragement from the fact that North Asia is opening up. So Taiwan, we have -- in fact, Taiwan has been spectacular. We're running at more than 100%. Nothing has changed. China is -- 95% of our people are back at work, and we are seeing business volumes at the 80% to 90% range. Korea has opened up, Hong Kong as well. The golf courses are opening, and the restaurants are opening and so on.
So because North Asia is opening up, as long as we can get -- and we don't have a second wave in Singapore, and we get the dormitory situation under control, I think there's reason to believe that you might start seeing an opening up in the third quarter, which is what we said in our base case. But I'd hasten to add, and I'm no expert, if you do see a big pickup, the pandemic resurgence, there's a winter pandemic, who knows what will come on the back of that.
On your second question, oil and gas. Our exposures overall have actually gone up in the last 3, 4 years, but the nature of our exposures has shifted. So as I told you, our exposures earlier, we had a much bigger exposure to the support services sector and the offshore marine space, and we brought that down quite sharply.
On the other hand, our exposure to the majors, whether state-owned or the oil majors, has continued to go up. So our loan book in '16 and '17 was about $17 billion or $18 billion compared to the $23 billion now. We've actually taken that book up. And that's been good because these are high-quality, top-end clients, and we do a whole range of businesses with them. So as I told you, we're not particularly concerned about the top-end book that we have.
Your question on how do you see this going forward is a function of what happens to the industry itself. If you project a $15 or $20 oil price into the future, I think a lot of capacity in this industry will start shrinking. And therefore, obviously, opportunities to do more fossil fuel financing, oil and gas finance, et cetera, might come off. And we'll play that by ear, depending on where the industry winds up at.
The good news is, at the same time, we've been increasing our exposure to the renewable sector. Last year, we did almost $2.5 billion, $3 billion of renewable financing, and we've continued to build it up. So we think that might be good a replacement opportunity.
Our next question is Stephanie from Financial Times.
I -- pardon me if maybe part of my question has already been asked, but I was speaking to customer services on the call, so there might be a risk that I'm doubling up. But I wanted to ask about the oil and gas exposure at DBS. So obviously, as a result of the price fall, the oil trader who must not be named, is the bank essentially planning on cutting back exposure to the industry in the next 2 months?
And in the process of sort of managing those exposures, are you looking to start sort of requiring more collateral from the borrowers in the sector or, for instance, adjusting risk pricing? And also, is the bank starting to -- or looking to start prioritizing stronger and sort of larger oil and gas borrowers and move away from sort of smaller players?
Well, first of all, the part of our exposure which is [ state-financed and linked ], they're obviously start thinking because the value of the commodity comes off. And so when the value comes off, obviously, the total amount that we need to finance comes off with the working capital requirements thing. So you will see some of that.
Having said that, the bulk of -- you're right, which I had mentioned this. The bulk of our exposures in the category of producers, processors, big reserves, the highest traders, it's very high end. So as I pointed out in my answer to a previous question, the difference in the nature of our book in the last 4 years is that we've actually gone much higher end than we were before. And because the book is very high end, it includes the global oil majors, it includes the state-owned companies, et cetera, we're actually not cutting back on our exposure to any of these names. We're -- in fact, as a general rule, we're quite happy to support high-end customers who we think are going to be survivors throughout this crisis.
What we are doing is we're taking a lot more focus on making sure that documentation around trade finance, the document dividends, et cetera, are -- we are being a lot more disciplined around that and trying to make sure that our due diligence around that is indeed tightened up.
Our last question, Takeshi from Nikkei.
I have a question on dividend policy. So are you considering lowering the payout ratio? Now some global banks took more importance on accumulating capital than paying out dividend. So how do you think of the importance of maintaining that dividend?
So as we've always said, our dividend policy has been to try and hold dividends stable and grow them in line with earnings. And as you know, over the last couple of years, oftentimes, we're asked why we don't increase dividends a lot more dramatically. And we've always said we want to be cautious, so that gives us enough headroom that we don't have to cut if we don't need to.
We're also conscious that a number of our shareholders are retail shareholders in Singapore. And so similar to the SMBC Hong Kong situation, many of these people do rely on us for their pension and monthly payments and so on, very conscious of that as well. Nevertheless, like everybody else, we want to see improvement. And therefore, we will continue to study the situation. If at the end of the next quarter, middle of the year, we think that the situation's going to be a lot worse than our stress assumptions, then we might have to go back and revisit the dividend in that case. So we will keep an open mind to it.
Okay. Thank you, Takeshi. And I think that's all the time we have today. So thank you, everyone, for joining us once again, and we'll see you again. Take care. Bye-bye.