Dark clouds over S'pore banks dissipating

Singapore

THERE are bets that the worst of bad debt provisions by Singapore banks to cover their exposure to the troubled oil and gas sector may be over, with DBS and UOB giving this assessment at their results briefings this week.

But OCBC and analysts remain cautious; some analysts warn that banks may find it tough to offload larger vessels amid a supply overhang and weak demand.

Much will also depend on the price of oil; the banks say it has to head higher, to as much as US$70 per barrel (bbl) before offshore support vessel operators can make a decent margin. Oil now costs about US$55/bbl.

S&P analyst Ivan Tan told The Business Times: "Lingering difficulties in the offshore-services sector have caused the market values of vessels to be depressed, hence necessitating more provisions. The key challenges such as structural overcapacity and tight cash flows are not likely to be resolved in 2017 unless oil prices recover significantly."

All three banks this week reported lower profits for the fourth quarter and the full year of 2016, stung by higher provisions for the oil and gas segment. Provisions have been set aside to cover an estimated expected loss in the value of loans under stress. These allowances are taken out of earnings, and so hurt the bottom line. The lenders have taken pains to explain how provisions are calculated, because these estimates reflect a discount to the market value of assets by which these loans are backed.

In the case of offshore and marine companies, these assets include vessels chartered for oil storage and transportation or to ferry staff.

As charter rates collapsed, the market value of these assets has also fallen, meaning that banks would have to set aside more to make up for the portion that is no longer covered by the asset value. And as charter rates fell, banks have had to refinance loans in a way that the borrowers can at least pay off the interest based on their currently weaker cashflow.

Indeed, UOB's chief financial officer Lee Wai Fai said on Friday that the bank was hit quite badly by the sharp fall in collateral value, and took a "drastic measure" to write down the assets.

Likewise, DBS's chief Piyush Gupta pointed to the "sharp discount" that the banks take to the collateral value. "The question is, how good are the collateral values?" he asked, saying that in one instance, the bank sold ships for more than what was expected from the collateral.

For the banks here, bad loans in the offshore-support vessel segment make up roughly a fifth of loans from that segment alone. Both DBS and UOB estimated that given the large specific provisions made in 2016 for the identified bad loans, the allowances made this year should be smaller.

OCBC's chief Samuel Tsien said the problems have deepened among the same troubled companies. But he would not guarantee that the worst of these provisions are behind the bank, pointing to the weak demand.

Analysts also note that the outcome of vessel sales is uncertain. "Larger purpose-built vessels may be harder to sell or need steeper discounts," said CIMB analyst Jessalynn Chen in a report.

To be clear, the banks say the troubles in the oil and gas sector will be prolonged.

There is focus now on Ezra Holdings, which has loans from all three Singapore banks. Ezra's subsea joint-venture firm was said to have found a white-knight investor, but soon after, Ezra's Japanese partners issued warnings of write-downs on their investments triggering a sell-down in shares of Ezra.

The banks have also restructured loans to large government-linked shipyards.

The lenders said the rest of the portfolio is sound.

Shares of DBS closed six cents higher at S$18.60, and OCBC gained seven cents to end at S$9.52. UOB, which capped the earnings season on Friday for the banks, gained 36 cents to end at S$21.18.