Moody's: Singapore banks' asset quality and profitability under pressure amid oil and gas weakness

Moody's Investors Service says that the 2015 results of Singapore lenders Oversea-Chinese Banking Corp Ltd (OCBC; Aa1/Aa1 stable, aa3) and United Overseas Bank Limited (UOB; Aa1/Aa1 stable, aa3) point to rising pressure on their asset quality, particularly for their sizeable oil and gas exposures.

"The banks have seen a broad-based deterioration in asset quality through 2015, a trend we expect to continue because of slowing economic and trade growth in Asia, and increasing stress for oil and gas borrowers in Singapore," says Eugene Tarzimanov, a Moody's Vice President and Senior Credit Officer.

Tarzimanov was speaking on the release of a new report titled "Singapore Banks: OCBC and UOB -- 2015 Results Indicate Rising Pressure on Asset Quality and Profitability".

Both OCBC and UOB report large exposures to oil and gas borrowers, including to services companies, which were most affected by the collapse in oil prices.

OCBC says 14% of its loans to oil services borrowers are non-performing, as already reflected in its 2015 NPL ratio of 0.9%, up from 0.6% in 2014.

UOB expects that up to 20% of its oil and gas loans will become vulnerable if oil prices remain low this year, with the largest deterioration in support services.

Given the prolonged softness in the oil and gas markets, Moody's expects both banks will increase their provisions in coming quarters, and in particular against their oil and gas exposures, which in turn will pressure their profitability.

Most of these loans are currently collateralized, but Moody's says the value of such collateral -- including specialized oil and gas and transportation equipment -- will have likely decreased due to weak secondary market liquidity and depressed charter rates.

Although the higher provisions will negatively affect the banks' profitability, Moody's does not expect a material impact on their still-solid capital buffers. Both banks continue to report robust pre-provision income that can cover the expected rise in credit costs.

The banks have also indicated that the quality of their other oil and gas loans, such as to producers, traders and refiners, remains resilient to the oil price collapse.