Earnings are under threat as bad loans multiply.
Singapore’s three largest lenders have experienced a steep share price drop in the first two weeks of the year, mainly on back of worries that there will be more loan defaults as oil prices crash to record lows.
According to RHB Research, current share price levels imply that the market may be pricing in a 10% default rate on oil and gas exposures. This is similar to non-performing loan (NPL) ratios recorded during the Global Financial Crisis, when DBS booked a 10.4% default rate for financial services firms, while OCBC’s and UOB’s bad loans from the manufacturing sector hit 6.9% and 7.7%, respectively.
“Growing predictions that oil prices would stay at depressed levels are stoking fear that Singapore’s three listed banks (SG Banks) would soon be hit with rising defaults in their oil and gas exposures,” said RHB.
Despite increased risks, Singapore banks are adamant that their NPLs will not reach alarmingly high levels.
“Although acknowledging that recent developments have increased asset quality risks, SG Banks believe the rise in non-performing loans (NPLs) would remain manageable. Most oil & gas customers are said to have a decent balance sheet to help them weather the challenging times,” said RHB.
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