Banks here can handle oil, gas stress: Fitch

The local banks have enough capital buffers to stay resilient in the face of the asset quality stress arising from the struggling oil and gas sector.
The local banks have enough capital buffers to stay resilient in the face of the asset quality stress arising from the struggling oil and gas sector. PHOTO: ST FILE

Ratings agency says S'pore banks have strong capital buffers that can meet rising credit risks

The local banks have enough capital buffers to stay resilient in the face of the asset quality stress arising from the struggling oil and gas sector, Fitch Ratings has said.

While oil and gas loans are likely to stay vulnerable, "we believe the rated Singapore banks are positioned well to meet rising credit risks from stresses in the sector because capital buffers are strong and underwriting procedures are disciplined," the ratings agency said in a report on Tuesday.

In their second quarter results, DBS Group Holdings, OCBC and United Overseas Bank (UOB) all reported higher non-performing loans (NPL) owing mostly to their exposure to the oil and gas sector.

DBS was hit the hardest, having to set aside some $400 million in allowances to cover for its exposure to Swiber Holdings, which recently applied for judicial management.

The weighted-average NPL ratio for the three banks rose to 1.23 per cent at June 30, Fitch said, up from 1.06 per cent at the end of last year and 1.11 per cent at March 31.

A modest rise in NPL ratios is likely if crude prices stay low but Fitch said that its stress tests show the banks can withstand the potential shock.

"The average Singapore dollar liquidity coverage ratio (LCR) for the three banks was higher than 200 per cent in the second quarter and the all-currency LCR averaged 138 per cent," it said.

LCR refers to liquid assets that banks reserve to ensure their ability to meet short-term funding needs even in an emergency.

Basel III requirements expect a minimum LCR of 100 per cent to be in place in 2019.

DBS, OCBC and UOB are all rated AA- by Fitch with a stable outlook.

Moody's is less confident on DBS. In a report yesterday, Moody's noted that the deterioration in DBS' asset quality during the first half of 2016 was "within the parameters of its ratings".

"On the other hand, the persistent challenges faced by DBS, particularly in relation to its oil and gas exposures, underpin the negative outlook on its credit ratings," it said.

Moody's has a negative rating outlook for DBS, OCBC and UOB, which means that the ratings may be reviewed for downgrade.

Exposed to Swiber, DBS and UOB have faced sell-offs.

DBS shares have pared 7.9 per cent to $14.98; UOB shares have dropped 4.7 per cent to $18.05. OCBC, with no Swiber exposure, slid a more manageable 2.1 per cent to $8.48.

Market watchers are divided in their view on DBS, with CIMB analyst Jessalynn Chen recently downgrading her call on the bank to hold with a lower target price of $15.31.

"We think DBS could lag behind its peers on recognition of NPLs and provisions. We slash our financial year 2016 to 2018 earnings per share forecast by 6 to 14 per cent for higher provisions," she said.

But Daiwa Capital Markets analyst David Lum reiterated his buy call for DBS, given its superior earnings' prospects and cheaper valuations than OCBC and UOB.

A version of this article appeared in the print edition of The Straits Times on August 11, 2016, with the headline 'Banks here can handle oil, gas stress: Fitch'. Print Edition | Subscribe