Moody's: UOB, OCBC face further squeeze on asset quality

The first-half financial results of Oversea-Chinese Banking Corp (OCBC Bank) and United Overseas Bank (UOB) show further weakening in their asset quality and profitability, says ratings agency Moody's. And this reflects the persistent challenges they face and underpins the negative outlook on their credit ratings.

But, said Moody's in a research report on Monday, the deteriorations so far remained within the parameters set for the current ratings of OCBC (Aa1/Aa1 Negative, aa3) and UOB (Aa1/Aa1 Negative, aa3).

Moody's said that the recent news of offshore oil services company Swiber Holdings applying for judicial management pointed to further asset quality challenges for the Singapore banks for the remainder of 2016. It noted that the Singapore banks were among the principal bankers for offshore services companies.

DBS Group Holdings, the third local banking group, will release its first-half results before the market opens on Aug 8.

After news of the Swiiber woes broke out last week, DBS found itself in the spotlight with a total exposure of about S$700 million to the Swiber group of companies and expecting only half of this to be recovered.

Singapore's largest bank said that it would tap its general allowance to provide for the anticipated shortfall, bringing its net allowance charge to S$150 million.

DBS disclosed this last week following Swiber's stunning move earlier to wind up the company, confirming market rumours about its significant exposure to the beleaguered oil-services firm. Then, in an about-turn, Swiber announced a day after that it would be taking the judicial management route instead.

The rest of the banks appear to have exposure that is minimal and manageable, including Citi and UOB. OCBC has no exposure to Swiber.

In the research report on OCBC and UOB, Moody's senior analyst Simon Chen said that the two banks' exposure to offshore marine services companies amounted to 13-18 per cent of their CET1 (Common Equity Tier 1) capital and loan loss reserves as at end-June.

Of the 19 offshore and marine (O&M) companies listed in Singapore, 10 recorded net losses for the first half of the year. These firms made up more than 60 per cent of total debt assumed by the 19 firms, said Mr Chen.

"NPLs (non-performing loans) for the offshore services sector will increase as more borrowers face cash flow strains and approach the banks for loan restructuring," he added.

"For both OCBC and UOB, non-performing loan ratios remained on an uptrend. In addition, the new NPL formation rate has accelerated, led by their oil and gas - particularly the offshore marine service companies - as well as overseas exposures."

OCBC's NPL ratio for oil and gas loans rose from 7.1 per cent at the end of March to 7.5 per cent. UOB did not disclose the NPL ratios for its oil and gas portfolio, but indicated that the majority of new NPLs recognised in the second quarter related to oil and gas borrowers

On top of this, the banks' returns on assets declined, reflecting a weakening in their core profitability, said Moody's. Nevertheless, Mr Chen pointed out, the banks' loss-absorption buffers remained stable. Higher core capital levels due to the slowdown in business and risk-weighted assets growth provided support to the ratings, he added.

This article was first published on August 2, 2016.
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