Banks brace for a deluge of bad debts in FY15

Mainly from the oil & gas sector.

This may well be the year of bad debts and poorer asset quality for Singapore’s three biggest banks.

According to CIMB, the higher general provisions made by the banks in the fourth quarter and heightened appearances of chunky one-off NPLs are telling signs of worsening credit quality in FY15.

“We expect credit costs to trend up to normalised levels in FY15 and NPL ratios to rise from the current 0.6-1.2%. The market has been most concerned about two areas of lending – oil & gas and commodities – given the sharp fall in oil and commodity prices,” stated CIMB.

The banks’ total exposure to the oil and gas sector stood at 5-7% of loans at the end of 2014. OCBC has the highest amount of loans to the sector at $25b, followed by DBS at $20b, and finally UOB at $10b.

Meanwhile, exposure to commodities stood at 4-11% of loans, with DBS in the lead at $30b. OCBC is a far second with $10b, followed by UOB with $8b.

“We are more concerned about the banks’ oil & gas exposure, especially their lending to upstream players. If oil prices remain low for an extended period of time, the banks may start to recognise NPLs in this area, as they are likely to have built in higher oil price assumptions in their stress test scenarios,” CIMB noted.

CIMB is particularly wary of the banks’ exposure to second-tier capital goods corporates such as Swiber, Swissco, Ezra and Ezion, whose financial metrics and working capital adequacy may start to deteriorate as vessel utilization and day rates go down with lower oil prices.

“We would also look out for possible stress in the wealth management space, as high net worth individuals have been the biggest speculators in oil rigs and buyers of corporate bonds issued by oil & gas names. We are less concerned about the banks’ exposure to commodities, as they mainly finance the movement of goods (not storage) and hence, are not exposed to fluctuations in the underlying prices of the commodities,” CIMB said.