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Singapore's major banks might be nearing end of bad-loan tunnel

For Singapore's three biggest banks by assets, provisions to cover potential losses on loans have likely peaked, analysts said.

Asset quality at the city-state's banks has been weakening for more than two years, in part due to missed payments and defaults among support-service providers in Singapore's oil and gas sector. Tapering demand for oil vessels and other engineering services amid weak oil prices has severely hit the industry's cash flow and profit margins, according to lenders and analysts.

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In 2017, DBS Group Holdings Ltd., Singapore's largest bank by assets, set aside S$1.38 billion as loan-loss provisions, the highest in eight years and up 19.5% from S$1.16 billion in 2016. But, as the oil and gas market recovers, albeit gradually, and because most Singaporean banks had made significant provisions before more stringent accounting standards, known as International Financial Reporting Standards 9, kicked off in January 2018, lenders and analysts expect they are likely near the end of the bad-loan tunnel.

Oversea-Chinese Banking Corp. Ltd.'s loan-loss provisions totaled S$621 million, down 5.3% from S$655.7 million in 2016. Provisions for bad loans at United Overseas Bank Ltd., the smallest of the top three in asset terms, also rose 15.5% year over year to S$660 million in 2017.

"Our view is most problems from oil and gas are behind for Singapore banks, particularly given the large nonperforming loan recognition in the second half of 2017 ahead of IFRS 9," Eugene Tarzimanov, an analyst at Moody's Investors Service, told S&P Global Market Intelligence.

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During the second half of 2017, DBS' NPL ratio started dropping after hitting a recent high in the 2017 third quarter, although asset quality at OCBC and UOB continued to worsen.

As of end-2017, UOB's nonperforming loan ratio of 1.78% was the highest among the three, followed by DBS' 1.68% and OCBC's 1.44%. As of end-2014, the nonperforming loan ratios of those banks were between 0.6% and 1.2%.

"It would be premature to say they are out of the woods. But I believe the banks have managed their exposures the best they could and provisioned heavily for the weak loans," said Ivan Tan, an analyst at S&P Global Ratings.

"They could start on a clean slate" in 2018, Tan added.

As of end-2017, OCBC's outstanding loans to the oil and gas support-services sector totaled S$4.8 billion, or 38% of the lender's entire loan book for the energy sector, according to company figures.

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Moody's said 43% of those loans are considered "safe" as they are lent to national oil companies and conglomerates, while the remaining are deemed "less safe." It added that almost three-quarters of those "less safe" loans are already classified as NPLs.

DBS said that as of the end June 2017, the latest data available, its outstanding loans to the oil and gas support-services sector totaled S$7 billion. The amount did not include its S$721 million loans to offshore engineering company Swiber Holdings, which will remain under judicial management until late 2018 after being unable to service its debt. At UOB, outstanding loans to this sector stood at S$3.8 billion as of end-2017.

Moody's Tarzimanov added that for the three major banks, about 70% of oil and gas NPLs continue to be serviced by borrowers.

Those banks have already applied deep discounts to the value of the borrowers' collateral assets, and further provisions on nonperforming loans in this sector are less likely under such a conservative approach, he said.

S&P Global Market Intelligence and S&P Global Ratings are part of S&P Global Inc.

As of March 2, US$1 was equivalent to S$1.32.

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Click here to see asset quality on an aggregate level for Singapore.
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