Local banks may encounter choppy waters ahead as issues surrounding their loan exposure to the struggling oil and gas sector persist through this half of the year.

Credit-rating agency Moody's raised the concern yesterday, noting that non-performing loans (NPLs) from the sector will increase in the coming quarters.

"We are expecting new NPL formation rate for offshore marine services companies to rise over the next few quarters," Moody's senior analyst Simon Chen told The Straits Times. "What we are seeing is that these companies are facing increasing cash-flow difficulties in the second half of 2016, and that will create more asset quality issues for the banks."

Moody's noted in its report yesterday on the results of OCBC Bank and United Overseas Bank (UOB) that the banks' NPL ratios hit new highs, due mostly to oil and gas loans.

The second-quarter results announced last week showed total NPLs at OCBC rose to $2.36 billion in the second quarter, up 61.4 per cent from a year ago. UOB's NPLs grew to $3.06 billion in the same period, 22 per cent higher than a year earlier.

And with total loans growth slowing significantly in the stagnant environment, the NPL ratio, or percentage of potentially bad loans in the total loan book, rose to 1.4 per cent for UOB and 1.1 per cent for OCBC, both the highest since at least the fourth quarter of 2013, Moody's said.

It added in the report: "Despite a modest bounce in crude prices since February, we expect the challenges faced by the offshore services companies to be protracted as vessel and utilisation rates remain lower than historical levels.

"The recent news of Swiber Holdings applying for judicial management points to further asset quality challenges for the remainder of 2016 for Singapore banks."

UOB and DBS Bank are both exposed to Swiber. DBS, which announces its results next Monday, has a $700 million exposure. UOB did not provide a specific figure.

But Swiber's troubles do not imply the banking sector is facing a systemic danger, market watchers noted.

CIMB private banking economist Song Seng Wun said: "There is no sign of a turnaround for the oil and gas sector yet, so I won't be surprised if more announcements like Swiber's come out. But ultimately their NPLs are just a very small part of the banks' loan book, so any potential impact will be manageable."

Monetary Authority of Singapore managing director Ravi Menon has said the banking system has enough provisions to cover more than 100 per cent of its NPLs.

So far, Moody's has maintained its Aa1 rating for DBS, OCBC and UOB. But the ratings have a negative outlook to account for the risks.