Singapore banks' credit profiles resilient despite oil-and-gas headwinds: Fitch

SINGAPORE banks' second-quarter results showed pressure on profitability and asset quality, but credit profiles should remain resilient despite the weaker operating environment, Fitch Ratings said in a recent commentary.

"We believe the banks have sufficiently strong loss-absorption buffers to withstand rising, cyclical global risks. Singapore banks enjoy steady funding and liquidity profiles and strong capitalisation," the credit rating agency said.

"We expect a modest increase in the non-performing loan (NPL) ratios for the three local banking groups - DBS Group, United Overseas Bank and Oversea-Chinese Banking Corp."

The weighted-average NPL ratio for these three banks remained low at 1.23 per cent at end-June 2016, compared with 1.11 per cent at end-March 2016 and 1.06 per cent at end-2015, it said.

Moderate asset-quality stresses did emerge in the Q2 results. These were more apparent at DBS which was more heavily exposed to Swiber Holdings, an oil and gas services provider that filed for creditor protection in July.

DBS classified S$651 million of Swiber exposures as non-performing in Q2, and set aside reserves of S$400 million. The bank's total exposure to the troubled group stood at S$721 million at end-July and DBS will classify the outstanding S$70 million exposure as an NPL in Q3.

"DBS's management believes its provisions for Swiber are conservative, and foresees some write-back in the future. Fitch feels the bank's loan-loss reserve policies are generally sound," it said.

"UOB says it will classify its Swiber exposure as an NPL in Q3, but the bank's ultimate Swiber provisions might be low - given the high level of collateral held against these risks. OCBC has indicated that it has no exposure to Swiber.

"We expect the banking sector's oil and gas loans to remain vulnerable amid weak sector fundamentals. However, we believe the rated Singapore banks are positioned well to meet rising credit risks from stresses in the sector because capital buffers are strong and underwriting procedures are disciplined."

It added that the three Singapore banks had a combined oil and gas exposure of S$51 billion at end-June 2016, which represented 47 per cent of the banks' combined equity at end-June 2016.

Total exposure to the more troubled support services sector, which has been badly hit by falling demand, amounted to S$17 billion or 15 per cent of the banks' combined equity. These latter exposures mostly tend to be secured.

"We believe operating conditions are likely to remain challenging in the near term. Oil and gas-related NPLs - arising either through loan restructuring or other forms of stress - are likely to increase if crude oil prices remain depressed, while less efficient and more highly leveraged borrowers will become increasingly vulnerable the longer the current economy remains lacklustre.

"Nonetheless, we think the three local banks can face additional macroeconomic headwinds in light of their strong and liquid balance sheets, sound lending practices and adequate profitability. Loan-loss reserve cover was reasonably strong at a weighted average of 113.3 per cent at end-June 2016."