Moody's expects decline in local banks' asset quality

It says their Q1 results just released support negative outlook on their credit ratings

Signs of further stress on the asset quality of the three local banks emerged in the first quarter as their loan book exposure to the ailing oil and gas sector took a toll, credit rating agency Moody's Investors Service said yesterday.

In first-quarter results over the past two weeks, DBS Group Holdings, OCBC and United Overseas Bank all recorded higher non-performing loans (NPLs) and NPL ratios compared with last year.

DBS' NPL rose 7.6 per cent year on year to $2.69 billion and its NPL ratio crept up from 0.9 per cent to 1 per cent. At OCBC, NPL jumped 60 per cent to $2.15 billion on an NPL ratio of 1 per cent, up from 0.6 per cent a year earlier. UOB's NPL was up 16.3 per cent to $2.84 billion and its NPL ratio increased from 1.2 per cent from last year to 1.4 per cent,

The figures highlight the rising challenges faced by the trio and support a negative outlook on their credit ratings, said Moody's in a report. The agency had already cut Singapore banks' credit rating outlook from stable to negative on March 31, on persistent concerns over asset quality and profitability.

"We expect the asset quality of all three banks will continue to deteriorate because of the slowing economic and trade growth in Asia, and stress on oil and gas borrowers in Singapore," Moody's noted yesterday.

This will pile pressure on their profitability as the banks are likely to set aside more loan provisions in the coming quarters, particularly as their specific provisions for oil and gas firms are still low.

"These loans are collateralised by specialised oil and gas equipment. We expect oil and gas exposures will require additional provisioning, because the value of this collateral will fall further as global oil prices remain low," the agency added.

Moody's will continue to monitor these issues before deciding whether to actually downgrade the banks' credit ratings, its vice-president and senior credit officer Eugene Tarzimanov told The Straits Times.

"We'll be watching how this weakening is offset or balanced by higher capital buffers, which we saw in the first quarter when all three improved their fully-loaded common equity tier 1 ratios," he said, referring to a key gauge of how well capitalised a bank is under the Basel III requirement.

"Our triggers for a rating downgrade include another 50 basis- point increase in NPL ratios - to around 1.5 per cent for DBS and OCBC for instance. Singapore banks are moving slightly closer to these triggers, but are still some distance away from a possible rating downgrade."

For now, however, market watchers are turning cautious on the banks' prospects, with Maybank Kim Eng analyst Ng Li Hiang keeping her sell call on OCBC with a target price of $7.2 - 14.7 per cent lower than $8.44 at yesterday's close.

"First-quarter results accentuated our concerns about revenue prospects and capital constraints. Asset quality looks likely to get worse," she said in a recent note.

"We trimmed 2016 to 2018 net profit estimates by 1 to 2 per cent, adjusting for lower non-interest income and higher provisions."

A version of this article appeared in the print edition of The Straits Times on May 06, 2016, with the headline 'Moody's expects decline in local banks' asset quality'. Print Edition | Subscribe