Outlook 2017

Rate hikes will hurt cash-tight oil and gas customers

Experts note there will be repercussions for borrowers and pressure on oil and gas loans, which will in turn affect local banks.
Experts note there will be repercussions for borrowers and pressure on oil and gas loans, which will in turn affect local banks.PHOTO: BLOOMBERG

Interest rates seem set to rise in tandem with what could be three increases in the United States this year.

At a glance, this looks like good news for the banking sector, as financial institutions can reap better loan yields and increase net interest margins.

But experts note there will be repercussions for borrowers and pressure on oil and gas loans, which will in turn affect local banks.

Mr Sky Kwah, a dealing manager at Phillip Securities, said: "Every basis point increase in the Singapore Interbank Offered Rate (Sibor), which is used to price home loans, translates to an increase in banks' net interest margins."

He noted the three-month Sibor was at 0.926 per cent last month following the US rate hike on Dec 14, up five basis points from 0.873 per cent in November.

Mr Kwah added that higher net interest margins could result in higher earnings this year and improve share price performance.

However, "the hike will further stress cash-tight oil and gas companies, increasing default risk", he noted.

Mr Roger Tan, chief executive of Voyage Research, said the rate hikes would create higher repayment burdens for borrowers.

"Given that the Singapore economy is not doing well, the potential top line increase may therefore be mitigated by the need for high non-performing loans provisions."

He expects 2017 will continue to be a challenging year for the banks.

"The boom in the banking sector in the past few years rested on two pillars - the oil and gas as well as property sectors.

"The property sector is still going through tough times due to property price control measures while the oil and gas sector is still suffering the oversupply effect. These two sectors are not expected to make a quick turnaround in 2017," he said.

Mr Tan, who noted that Singapore thrived after the Lehman crisis from these two sectors, added: "However, the 'easy money' has been withdrawn, oil prices have fallen significantly and the Singapore economy is going through headwinds."

Mr Kwah sees "a few silver linings".

He said the Ministry of Trade and Industry is providing bridging loan facilities to energy firms and an improved Internationalisation Finance Scheme "that could help these companies to access more credit facilities to support their overseas expansion".

"This should help companies facing liquidity issues in the midst of weak oil prices, reducing the probability of defaults for smaller firms."

He also noted the potential recovery in oil prices and United States President-elect Donald Trump's plan to amend the Dodd-Frank Act, where banks need higher reserves that cannot be used for lending or business costs.

"A deregulation will encourage buying momentum in the overall banking sector," said Mr Kwah.

A version of this article appeared in the print edition of The Straits Times on January 02, 2017, with the headline 'Rate hikes will hurt cash-tight oil and gas customers'. Print Edition | Subscribe