Singapore banks 2015 results show rising pressure on asset quality and profitability: Moody's

People use automated teller machines of UOB, DBS and OCBC banks in this Jan 5, 2016 file photo.
People use automated teller machines of UOB, DBS and OCBC banks in this Jan 5, 2016 file photo. PHOTO: REUTERS

SINGAPORE - Credit rating agency Moody's Investors Service Singapore said in a report released on Thursday (Feb 25) that the latest quarterly results of Singapore's three major banks - DBS, OCBC and UOB - show the rising pressure on their asset quality and profitability:

On Monday, DBS Group Holdings reported full-year 2015 results that revealed sizable oil and gas exposures on its books.

DBS' results followed announcements the previous week by Oversea Chinese Banking Corp and United Overseas Bank showing similar exposures.

The three banks' oil and gas exposures are credit negative because they point to reduced asset quality amid currently low oil prices.

All three banks reported higher nonperforming loans (NPLs) in 2015 as the rout in oil prices has negatively affected domestic loans, while regional macroeconomic headwinds, particularly in Indonesia and Greater China, have hurt foreign loans.

DBS outperformed OCBC and UOB, reporting the smallest NPL increase last year.


We expect that the asset quality of all three banks will continue to deteriorate because of slowing economic and trade growth in Asia, and increasing stress for oil and gas borrowers in Singapore.

The banks' large exposures to oil services companies are particularly risky because these companies have been most affected by the collapse in oil prices.

Singapore banks' exposures to oil and gas services firms are a significant 13-25 per cent of their common equity Tier 1 capital. Despite its better NPL record until now, DBS reported the highest exposure of the three banks.


According to DBS, only 1.3 per cent of loans to oil-support-services borrowers are already nonperforming. Based on the bank's stress test, which assumes that oil prices remain at US$20 per barrel over the next two years, the bank estimates that it would need to make additional loan impairments totaling around SGD200 million (about seven basis points of 2015 gross loans).

Meanwhile, OCBC reported that 14 per cent of its loans to oil services borrowers are nonperforming and are already reflected in its 2015 NPL ratio. UOB expects that up to 20 per cent of oil and gas loans would become nonperforming if oil prices remain low this year, with the largest deterioration coming from support services. If UOB were to classify 20 per cent of its oil and gas loans as NPLs as of year-end 2015, its NPL ratio would increase to 2.6 per cent from the reported 1.4 per cent.

We expect rising pressure for additional provisioning. The banks' current specific provisions for oil and gas service companies are low because these loans are collateralized. However, if global oil prices remain weak, we believe that the value of such collateral, which includes specialized oil and gas and transportation equipment, will fall owing to weak secondary market liquidity and depressed charter rates, which will require additional provisioning.

At the same time, the banks indicate that the quality of their loans to oil/gas producers, traders and refiners has remained stable.

Although higher loan-loss provisions would negatively affect Singapore banks' profitability in 2016, the new provisions would be unlikely to eat into the banks' capital buffers. This is because their pre-provision income remains robust and sufficient to fully cover the potential rise in credit costs.