OCBC's shift from offshore exposure to sustainable financing no less challenging

WITH the recent slashing of OCBC's exposure to the offshore support vessels (OSV) sector, the question is whether the bank's plan to rev up its sustainable finance portfolio will be able to make up for the gap.

Analysts said that while it is clear that sustainable finance is on an upward trajectory, it comes with its own set of challenges and should not be looked upon as a "replacement" to offset the decline of the OSV sector.

For a start, OCBC's sustainable finance portfolio already exceeds its loans to the OSV sector. The bank surpassed its earlier S$10 billion target for sustainable finance by 2022 two years early in the first quarter of 2020. As of the first half of 2020, it accounts for 5 per cent of OCBC's total loan portfolio.

In comparison, its OSV book came up to about 2 per cent of loans at end-June. The focus on OCBC is particularly so as the bank said in its second-quarter results it had written down the carrying value of the existing OSVs amid a dismal outlook of the sector. Excluding conglomerates, the bank's OSV portfolio is now down to less than 0.3 per cent of total outstanding loans.

Thilan Wickramasinghe, analyst at Maybank Kim Eng, said that given low energy prices and an uncertain Covid-19 outlook, the OSV sector will remain challenging going forward.

"On the other hand, there is increasing demand for green and sustainable financing as companies look to rebuild and restructure their business models coming out of this pandemic," he added.

With the risks of global warming and unsustainable business activities being brought to light, it will become essential for banks to increase their green and sustainable exposure to mitigate some of these risks, and also to improve returns, he noted.

Willie Tanoto, director, Asia-Pacific banks, Fitch Ratings, noted that OCBC's new goal of S$25 billion by 2025 represents an average growth of more than 20 per cent a year, which means that the gap between its sustainable finance portfolio and OSV financing will only widen.

Despite operational obstacles, he noted that there has been "tangible progress" spearheaded by the government and the regulator to create an enabling environment for green financing to take off.

Among the various initiatives include a US$2 billion green investments programme announced by the Monetary Authority of Singapore (MAS) in November 2019 to drive growth in sustainable finance.

In June this year, MAS launched a consultation with the local financial sector that zoomed in on stricter environmental risk management guidelines.

That being said, Mr Tanoto does not view OCBC's sustainable finance portfolio as an offset or a replacement of lending to the OSV sector.

"A green loan is still subject to the same credit underwriting process as conventional loans, so it is not inherently more or less safe or profitable," he said. "Green financing's impact on the bank depends on what sector it is in and the risks and economics of lending to each borrower."

The challenges in originating bankable green assets are not OCBC's alone, but for banks in the region, he noted.

He said some of these green sectors in South-east Asia are relatively young or small-scale and may not always be suitable for bank financing in terms of commercial viability.

"The ability of banks to quantify a project's green impact, certify its green credentials and monitor the use of proceeds are also ongoing challenges, in part due to the lack of consistent definitions and standards," added Mr Tanoto.

Kevin Kwek, managing director of Asian financials at Alliance Bernstein, concurred. "Not every claim to be 'green' will be so. (It is) a bit like Shariah financing - it is not universally agreed by different countries what qualifies, so secondary trading is a challenge."

However, he still expects sustainable finance to accelerate on the back of growing investor interest, while OSV financing will moderate.

The move by OCBC is in line with many banks, which is to reduce exposure to environmental, social and governance (ESG)-sensitive areas, while stepping up the pace on green financing, said Mr Kwek.

"The motivation for ramping up green financing isn't just to offset the slashed exposure in fossil fuel related industries, but to allow the banks to move up ESG ranks for investors," he noted. "But considering origination breadth and depth as well as secondary market liquidity, it might take some time for a full 'match' of what's dropped in OSV."

To be sure, he noted that Singapore banks have been participating in sustainable finance deals for some time. In August, DBS, OCBC and UOB topped the Bloomberg Asia (ex Japan) league table for green loans, making up almost 30 per cent of the table share.

While sustainable finance is on the way up, the OSV sector appears to be in decline, with the sharp fall in demand and subsequent drop in oil prices wreaking havoc in the industry. Fitch Ratings' Mr Tanoto pointed out that the OSV sector is dependent on market conditions in the upstream oil and gas sector, and the headwinds are "broadly expected to persist for the near term".

"The banks' writing down of collateral values and higher provisions are probably a recognition of such a sector outlook," he said.

Andrea Choong, analyst at CGS-CIMB Securities, said that any pickup in OSV financing will very much depend on increased charter demand, which could be sluggish given the current modest rate of economic recovery. This is in contrast with sustainable finance, as more investors place more emphasis on renewable energy and hold corporates accountable via a shift in investment mandates towards sustainable financing.

Even with the challenges ahead, analysts are in agreement that sustainable financing in Singapore will continue to see rapid growth, but the jury is still out on just how fast this will be.

Ms Choong said: "We do expect sustainable financing to eventually be a key focus area for all banks, but the pace of growth of this segment will depend greatly on investors' push towards renewable energy and climate change."

She pointed out that it is "typically not a quick process" for corporates to have the entire operation chain to comply with various guidelines to be considered green or sustainable, given the scale of sectors such as palm oil and water treatment.

In response to queries from The Business Times, Mike Ng, OCBC's head of structured finance and sustainable Finance, said that he expects the sustainable finance momentum to gain even more pace, as Covid-19 has helped to draw attention to wider sustainability issues, including social ones.

"In the wake of the pandemic, the collective action taken by both the public and private sectors can help to rebuild economies in a more sustainable fashion," he added. "We see opportunities in industries such as renewable energy, clean transportation, water and waste management."