Banks face more defaults as oil and gas malaise spreads

DBS and OCBC are most exposed.

Singapore's largest banks are under threat as more oil and gas companies struggle to repay debts, according to a report by Maybank Kim Eng.

Maybank Kim Eng noted that recent events such as Sete Brasil's possible bankruptcy filing and Noble Group's bond troubles have shifted focus for Singapore banks from growth and NIMs to credit spreads and asset quality.

"Against a slump in cash flows, some affected corporates have proactively sought out the banks to renegotiate the terms of their loan agreements. Certain bigger corporates have solicited consent from bondholders to modify the bond covenants. Asset quality deterioration for Singapore banks will linger, especially on their exposure to O&G an commodities," Maybank Kim Eng said.

"The NPL assumption for commodities and O&G for 2016/17 works out to only ~3% of exposures. This now looks unrealistically low. Also, in the financially distressed O&G sector
where the asset market is illiquid, the intrinsic value of fixed assets would ikely plummet. The charge off rate per dollar of O&G/commodities NPLs might be higher than the 55% assumed currently," the report added.

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