Singapore banks’ lacklustre results reveal glaring weakness in asset quality: Moody’s

Non-performing loans are at a disappointing uptrend.

Defaults are skyrocketing in the city-state’s banks, particularly OCBC and UOB, led by their oil and gas and overseas exposures.

According to Simon Chen, Moody’s vice president and senior analysts, returns of assets have continued to decline, pressured by weaker revenue growth.

"Notwithstanding these headwinds, their loss-absorption buffers have remained stable, as both banks recorded higher core capital levels due to the slowdown in business and RWA growth, which provide support to their ratings," said Chen.

Asset quality is the primary weakness for the two banks, as their NPL ratios rose to new highs in the second quarter of 2016, driven by O&G loans and foreign loans.

“OCBC reported an increase in its NPL ratio for oil and gas loans (which include offshore marine borrowers) to 7.5%, from 7.1% at end-March 2016. UOB did not disclose the NPL ratios for its oil and gas portfolio, but its management has indicated that the majority of new NPLs recognized in this quarter relate to oil and gas borrowers,” Moody’s said.

Additionally, of the 19 offshore service companies (including oilfield services companies) listed in Singapore, ten companies recorded net losses in 1Q2016. “These loss making companies accounted for over 60% of the total debt assumed by the 19 offshore service companies,” Moody’s added.

Meanwhile, the banks’ exposures to the oil and gas sector remains significant, with UOB's and OCBC's exposure to offshore marine services companies amounting to 13%-18% of their CET1 capital and loan loss reserves at end-June 2016, Moody’s said.