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O&M sector's troubles to affect Singapore banks' asset quality: Moody's

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The S$150 million 6.5% certificates due 2018 were issued by its subsidiary, Swiber Capital Pte Ltd

SWIBER'S application for judicial management points to further asset quality challenges for Singapore banks for the rest of this year, said Moody's.

In a note on Monday, the ratings agency noted that Singapore banks are among the principal bankers for the offshore services companies.

OCBC and UOB's exposure to offshore marine services companies amounted to 13-18 per cent of their CET1 (Common Equity Tier 1) capital and loan loss reserves as at end-June, said senior analyst Simon Chen.

Of the 19 offshore and marine (O&M) companies listed in Singapore, 10 recorded net losses for the first half of the year. These companies made up over 60 per cent of total debt assumed by the 19 firms, he explained.

"NPLs (non-performing loans) for the offshore services sector will increase as more borrowers face cash flow strains and approach the banks for loan restructuring," said Mr Chen.

The recently released first-half results for OCBC and UOB show weakening in their asset quality and profitability, reflecting persistent challenges they face, according to Moody's. These also underpin the negative outlook on their credit ratings, it added. "For both OCBC and UOB, non-performing loan ratios remained on an uptrend. In addition, the new NPL formation rate has accelerated, led by their oil and gas - particularly the offshore marine service companies - as well as overseas exposures."

OCBC's NPL ratio for oil and gas loans rose from 7.1 per cent at the end of March to 7.5 per cent. UOB did not disclose the NPL ratios for its oil and gas portfolio, but indicated that the majority of new NPLs recognised in this quarter relate to oil and gas borrowers

On top of this, the banks' returns on assets continued to fall, pressured by weaker revenue growth, according to Mr Chen. Nevertheless, he pointed out that the banks' loss-absorption buffers have remained stable. Higher core capital levels due to the slowdown in business and risk-weighted assets growth provide support to the ratings, he added.