Singapore - IT'S a new year of old problems for Singapore banks, with their shares falling 12-15 per cent since the start of 2016 on concerns over oil-and-gas exposure, and China.
With oil prices slipping below the US$28 mark as the lifting of international sanctions on Iran, the world's fourth-largest oil producer, could mean a deeper supply glut, analysts warned of more bad loans from the sector, but said this should not cause alarm.
"Growing predictions that oil prices would stay at depressed levels are stoking fear that Singapore's three listed banks would soon be hit with rising defaults in their oil and gas exposures," said a recent RHB report.
"Although acknowledging that recent developments have increased asset quality risks, Singapore banks believe the rise in non-performing loans (NPLs) would remain manageable. Most oil-and-gas customers are said to have a decent balance sheet to help them weather the challenging times."
In the third quarter, OCBC and UOB both reported higher NPLs due mainly to its oil-and-gas customers.
At OCBC, bad loans rose to 0.9 per cent from 0.7 per cent a year ago. OCBC said then it was taking "proactive" measures on some accounts, and had restructured certain loans. Those loans, based on new repayment terms, were still performing as at the bank's last update in Q3. UOB's NPL that quarter rose to 1.3 per cent from 1.2 per cent a year ago.
DBS's NPL ratio was unchanged at 0.9 per cent, holding constant for six consecutive quarters. The bank said stress tests showed at that point that 5 per cent of its portfolio would be affected if oil prices remained low for the next 24 months.
At current share prices, investors are pricing in a near 10 per cent default rate for oil-and-gas exposure for the banks, RHB said. At that dire level, credit costs for the oil-and-gas sector will breach that of the global financial crisis. This assumes the same loan-loss coverage in 2016, or the amount set aside for potential losses on loans.
"While we believe NPLs are unlikely to reach those levels, volatility in the currency and oil markets as well as poor visibility on asset quality trajectory would continue to weigh on share price performance in the near term." By Nomura's estimates, Singapore banks have an 8 to 13 per cent exposure to the commodities sector.
"In recent weeks, market concerns have shifted to the potential failure of a commodity trading company. We do not believe that local banks would emerge unscathed in such a scenario but our conversations with the banks suggest that, so far, they have not seen a material increase in risk from this portfolio," Nomura's report said.
The oil market is not just beholden to the limbo rock between Opec and the US, but is also gripped by fears that demand from China is cooling as its economic growth slows.
Still, the broader worries of China, which reports its Q4 GDP on Tuesday, seem less pressing for the Singapore banks. Standard & Poor's banking analyst Ivan Tan said Singapore banks' main exposure is to trade finance loans, which are short term.
"When the Chinese economy slows down, such trade finance loans also decline rapidly, compared to long term loans that stay on the book. So in a way, the Singapore bank exposure to China is somewhat self-correcting, and they are less exposed to long term credit risks," he told BT.
The arbitrage opportunities for offshore and onshore yuan have also reduced, meaning far lower demand for trade finance loans as well.
DBS, which took full advantage of this demand when the interest rate differential was large, has said it would shift its focus on trade finance - which made up about 70 per cent of revenue from transaction banking - to grow its cash management business. By 2020, it expects an even mix in revenue contribution.
DBS, with its largest exposure to China, has made the bulk of its non-trade finance loans to foreign firms or state-owned enterprises, Nomura noted. It added that such a portfolio is not risky, and the concern at DBS is about growth and not asset quality. Andrew Wood, head of Asia country risk research at BMI Research, is likewise hopeful that banks have been cautious in their lending in China.
"However, rising NPLs in China owing to the economic slowdown and over-leveraging in the economy will take a toll on loan growth there, and could dent the profit outlook for Greater China operations," he told BT.
Due to its highest China exposure, DBS shares have lost the most among the trio, down 15 per cent since the start of the year. OCBC has fallen 12 per cent, and UOB 13 per cent.
Nomura also sees a healthy gain for Singapore lenders from the recent yuan depreciation against the US dollar. Other Asian currencies are also expected to fall against the greenback, which should translate to higher Singapore interest rates.
A bearish view is held by Morgan Stanley, which sees Singapore banks as being less defensive as the credit cycle turns, and amid slow loan growth. It has downgraded DBS to a "hold" and UOB to a "sell", citing pessimism over loan growth and returns. It keeps a "buy" call on OCBC, on hopes that the bank's insurance business would offer a buffer.
This article was first published on January 19, 2016.
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