SINGAPORE - Credit rater Moody's Investors Service said the first quarter results Singapore's Big Three banks point to rising challenges and support the negative outlook on their ratings.
The results of DBS Group Holdings, Oversea-Chinese Banking Corporation and United Overseas Bank "reveal a further weakening in their asset quality and/or profitability from the levels seen at year-end 2015," said Moody's in a report released on Thursday (May 5).
"The three banks reported higher nonperforming foreign loans in the first quarter of 2016, with DBS and OCBC leading the increase," said Eugene Tarzimanov, a Moody's vice president and senior credit officer.
According to the report, a weakening of OCBC's foreign loans was mostly driven by exposures in Indonesia, while DBS' foreign nonperforming loans (NPLs) increased because of exposures in Hong Kong.
As for domestic loans, DBS and UOB posted stable or improved asset quality metrics, while OCBC reported a mild weakening, said the report.
"We expect the asset quality of all three banks to continue deteriorating because of slowing economic and trade growth in Asia, and stress on oil and gas borrowers in Singapore," said Mr Tarzimanov.
Moody's noted that the banks' exposures to oil and gas and to other commodity companies remain significant. It expects that NPLs will increase in this lending segment, particularly for oil and gas services loans which include offshore marine borrowers, because global oil and other commodity prices are likely to remain low for longer.
OCBC reported the weakest quality of oil and gas loans during the first quarter, with 7 per cent of the loans classified as NPLs at end-March 2016, mostly led by borrowers in the offshore marine sector, Moddy's noted.
Moody's said it expects rising pressure on profitability for all three banks, due to additional provisioning - particularly as the banks' specific provisions for oil and gas companies are low and because these loans are collateralized by specialized oil and gas equipment.
The value of this collateral will fall further, as global oil prices remain low, said Moody's.
It said, however, that while higher loan-loss provisions will negatively affect the banks' profitability in 2016, the new provisions will not likely eat into the banks' capital buffers, because their pre-provision income remains robust and sufficient to fully cover the potential rise in credit costs.
In addition, all three banks maintain a strong NPL coverage of more than 100 per cent, said the credit rater.