Singapore banks’ asset quality to continue worsening: Moody’s

SINGAPORE — The asset quality of DBS Group, Oversea Chinese Banking Corp (OCBC) and United Overseas Bank (UOB) is expected to continue to deteriorate because of slowing economic and trade growth in Asia and stress on oil and gas borrowers in the city-state, Moody’s Investor Service said on Thursday (May 5) in a report.

The ratings agency said the banks’ recently released first quarter results revealed a further weakening in asset quality and/or profitability from end-2015 and support its negative outlook on their credit ratings.

DBS reported a 6 per cent rise in first quarter core net profit to S$1.2 billion as an increase in housing loans and corporate borrowing offset a drop in China-related trade loans, while OCBC’s earnings fell 14 per cent to S$856 million as provisions for bad loans more than doubled and the contribution from its insurance unit declined. UOB’s net income, meanwhile, fell 4.4 per cent to S$766 million, with gains in net interest income offset by a drain in earnings from wealth management, trading and investment.

DBS and OCBC saw higher non-performing loans (NPLs) with the former’s foreign NPLs due to its Hong Kong exposure while OCBC’s weakening in foreign loans was mostly driven by Indonesia.

Noting that the banks’ exposures to oil and gas and other commodity companies remain significant, Moody’s said it expects NPLs to increase particularly for oil and gas loans which include offshore marine borrowers as global oil and commodity prices are expected to remain low.

The ratings agency said it also expects rising pressure on profitability due to additional provisioning as the banks specific provisions for oil and gas companies are low because these loans are collateralised by specialised equipment.

Oil and gas exposures will require additional provisioning because the value of this collateral will fall further as global oil prices remain low, Moody’s explained.

In March, Moody’s cut its rating outlook on the three Singapore banks to negative from stable, saying that a more challenging operating environment will pressure the lenders’ asset quality and profitability. Rating outlooks provide an opinion on the likely rating direction over the next 12 to 18 months.

Although it lowered the outlook to negative, Moody’s said the Singapore lenders maintain very strong buffers in terms of capital, loan-loss provisions and pre-provision income. Therefore, it affirmed the banks’ credit ratings, baseline credit assessments and counterparty risk assessments. OCBC and UOB are both assigned Aa1 ratings, one notch below the top rating. DBS Bank is also rated Aa1 but its parent DBS Group Holdings is rated Aa2, two notches below the best rating.