Singapore banks are well-placed to meet rising credit risks from ongoing stresses in the oil and gas sector, says Fitch Ratings. Strong buffers and disciplined underwriting standards should mitigate the impact on the profitability and balance sheets of Singapore banks.
The effects of lower oil prices on oil and gas companies in the region have become increasingly apparent. The media have in recent months reported a number of Singapore-listed mid- to small-sized oil and gas companies are in the process of restructuring bank loans or receiving going-concern warnings from their auditors based on 2015 results.
More broadly, Fitch had expected the credit metrics of rated south-east Asian oil and gas companies to deteriorate further this year amid still-low oil prices of around USD50/bbl and maintained a negative outlook on the region's oil and gas sector for 2016.
The three Singapore banks - DBS, OCBC and UOB - have a combined oil and gas exposure of around SGD49bn based on data at end-2015 for DBS and end-1Q16 for the other two. Loans make up 78% of the banks' exposures, though portfolios show differing exposures to producers, offshore support services, traders and downstream subsectors.
Moderate stresses emerged in the 1Q16 results and seem to have affected OCBC more than the other two Singapore banks, with DBS citing no signs of stress at this point. The difference could be partially due to OCBC's more conservative NPL classification for restructured loans compared with its local peers. That said, OCBC's new problem loans are still mostly being serviced, while the internal stress tests of DBS and UOB indicate that the increase in credit charges will remain manageable even under a prolonged low oil price scenario.
Fitch believes that Singapore banks are well-positioned to withstand potential asset quality deterioration given their disciplined underwriting standards and healthy provision buffers of 128% (as a proportion of NPLs). Singapore banks' rating profiles will also continue to be supported by their adequate profitability, steady funding and liquidity pools, and strong capitalisation, which are reflected in their recently affirmed 'AA-' ratings with Stable Outlooks.