Oil is OCBC's chief stress; CEO warns of deepening issues

Singapore

OFFERING the second prognosis on the state of Singapore banks' exposure to the oil-and-gas (O&G) sector, OCBC chief Samuel Tsien on Wednesday warned of "deepening issues" for the sector, and outlined the bank's early restructuring steps taken to ride out the oil crisis.

There are signs pointing to OCBC's grave concern: All its net new non-performing loans (NPLs) in the last year are from the O&G segment, which is a big part of Singapore's economy. The bank's NPLs as a ratio to all loans rose to 0.9 per cent from 0.6 per cent a year ago; it is unchanged from a quarter ago.

Mr Tsien, giving OCBC's results briefing a day after UOB had done so, suggested that stress in the rest of the overall loan portfolio was well-contained, but warned that things were far from rosy.

"During this period, it's most important to appropriately manage portfolio quality," he said, but maintained his call that NPL ratios would not breach the level seen during the global financial crisis (GFC), when it peaked at 1.9 per cent.

The bank's total oil-and-gas portfolio stood at S$12.4 billion, or 6 per cent of total customer loans, Mr Tsien disclosed at the briefing. Of this, 47 per cent comprised loans to offshore support services. This amounted to S$5.8 billion in loans to these upstream companies, which are more vulnerable at a time of low oil prices.

"That 47 per cent is under more stress than the remaining," he said, adding that of these, 14 per cent - or just over S$800 million - have been classified as NPLs.

OCBC has approached O&G support-services players to negotiate lending terms, with the aim of ensuring that vessels can be chartered and deployed, even if it is to be at a lower price than before. These negotiations showed up in the third-quarter results; the bank's NPL rose to 0.9 per cent from 0.7 per cent from a year ago.

OCBC has assumed, among other things, that oil prices will fall to US$20 a barrel in its stress tests.

"There is no point in leaving the vessels idle. We need to have the vessels to continue to be deployed, so that they can continue to generate cashflow," said Mr Tsien.

"We are pleased that we did that fairly early on, so that some of those vessels, which would otherwise have become off-charter or be renegotiated at a significantly lower rate, were able to attract slightly higher rates than they can currently get, but that is still lower than their contractual rate."

Following market conventions, O&G loans remain secured against the vessels - meaning that should borrowers default, the bank has the right to sell the assets to recoup losses. But this may be cold comfort as oil prices fall, and the supply of vessels rises.

"If you were to dispose of them in the market, would there be enough buyers for these rigs?" he asked.

Once there is a negotiated loan, the lending is deemed restructured, and this falls into OCBC's NPL pool, even though the loan may not have been overdue at the point of negotiation. These likely affect smaller O&G players, though Mr Tsien noted that customers who are "part of a larger group" have had no cashflow issues, and are not seeking loan restructuring.

As a comparison, UOB announced on Tuesday that its outstanding loans to upstream industries made up S$3.8 billion or 49 per cent of its S$7.7 billion in total O&G lending.

Its O&G lending accounted for 3.6 per cent of total loans. UOB chief Wee Ee Cheong said that if oil prices stay low, 20 per cent of the bank's S$12 billion O&G exposure may show weakness.

UBS analyst Aakash Rawat noted that using UOB guidelines could imply one per cent more in O&G NPLs for OCBC, bringing the NPL to OCBC's GFC-peak of 1.9 per cent, though this assumes all things stay unchanged.

DBS, which will round off the bank earnings session on Monday, said in its third-quarter results that S$9 billion of its O&G exposure - or 40 per cent the total S$22 billion - belonged to the support-services segment. This is not directly comparable, since exposure goes beyond lending and includes off-balance sheet items.

Mr Tsien added that the market remains challenging overall. "The investment confidence is not very high. The market is volatile, and visibility is low."

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