Even collateralised loans are at risk.
The pressure is mounting for OCBC and UOB’s asset quality, particularly for their sizeable oil and gas (O&G) exposures.
According to a report by Moody’s, the banks have seen a trend of broad-based asset quality deterioration through 2015, and it is expected to persist on back of slowing economic and trade growth in Asia as well as increasing stress for O&G borrowers in Singapore.
Both OCBC and UOB have reported large exposures to O&G borrowers, including to services companies, which were hurt most by the crashing oil prices.
“OCBC says 14% of its loans to oil services borrowers are non-performing, as already reflected in its 2015 NPL ratio of 0.9%, up from 0.6% in 2014. UOB expects that up to 20% of its oil and gas loans will become vulnerable if oil prices remain low this year, with the largest deterioration in support services,” stated the report.
With the sustained weakness in the O&G markets, both banks will likely boost provisions in coming quarters, and in particular against their O&G exposures. This, in turn, will pressure profitability.
The report further notes that while most of these loans are currently collateralised, the value of such collateral—including specialised O&G and transportation equipment—will have likely dropped on back of flagging secondary market liquidity and weak charter rates.
Meanwhile, though the increased provisions will hurt the banks’ profitability, their solid capital buffers will likely see no material impact. Both OCBC and UOB continue to report robust pre-provision income that can cover the expected pick-up in credit costs. Also, the banks have indicated that the quality of their other O&G loans, such as to producers, traders and refiners, remains resilient to the oil price collapse.
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