SINGAPORE (June 28): Maybank Kim Eng is maintaining its “neutral” call on Singapore banks.

This is due to tail risks coming from the oil and gas (O&G) sector.

The price of crude oil has recently dropped to US$46 per barrel on concerns of a supply glut to levels not seen since OPEC’s output cut in November 2016.

In a Wednesday report, analyst Ng Li Hiang says, “The worst of O&G non-performing loan (NPL) worries for Singapore banks have abated, but the risks linger.”

Singapore banks have not reduced their exposures in the O&G sectors, but since DBS/OCBC’s O&G support services NPL ratio is 22-23%, the delinquency pace should ease. Credit costs however may scale higher.

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“Against sanguine economic prospects, asset quality is unlikely to be the focus unless oil price slips below the US$40 level,” says Ng.

The bond yield for the Bloomberg USD high-yield corporate energy index has risen to 7.7%, matching levels seen back in end-November 2016.

Smaller Singapore-listed O&G companies, such as Nam Cheong and Pacific Radiance, have increased yields of short dated notes. However, Ng thinks “more default risks remains” as Swiber and Swissco are under judicial management, while Ezra has filed for bankruptcy.

Ng believes that the acceleration of new NPLs will be easing as Singapore banks have diverged their risk appetites.

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Lending to the O&G sector increased 6-20% between 4Q16 to 1Q17 q-o-q from higher exposures to upstream and less risky downstream/traders segment.

As banks started to take proactive steps to classify the NPLs, Ng estimates that the NPL ratio for support services increased to 15-23% in 1Q17 from 9-18% in 3Q16.

Since the weakest exposures have already been identified as delinquent, Ng believes that new NPL formation will start to ease.

“But further deterioration of industry dynamics could require higher specific provisions. We estimate FY17 credit costs to be 33-36bps for the banks,” comments Ng.

UOB saw the lowest O&G exposure, but has a higher NPA coverage of 116% compared to its peers (101-103%), making it “relatively shielded” from further asset-quality deterioration.

Ng’s preferred Singapore bank is DBS as the bank has shown the ability to manage liability costs to drive PPoP.

Other risks to the call include NIM improvement from higher rates, higher non-interest income and benign credit costs.

As of 10.34am, shares of DBS, OCBC and UOB are trading lower at $20.33, $10.71 and $22.91.

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