Why Singapore banks will still be laden with O&G woes

Every 10bps increase in credit cost estimate will cause a 7% cut in net profits.

Singapore banks have ~1-3% of loan exposure to the O&G support services sector. Maybank Kim Eng notes that lending to this sector is on a downtrend, reflecting banks’ reduced risk appetite. The NPL ratio for support services was around 15-23% as at 2Q17.

Here's more from Maybank Kim Eng:

Further deterioration in O&G industry dynamics would require higher specific provisions (SP). We maintain the view that provisions for O&G will remain elevated.

We estimate credit costs of 29-34bps on average for Singapore banks between FY17-19E. For every 10bps increase in FY17E credit cost estimate, net profits will be reduced by 6-7%, ceteris paribus.

Although UOB has the lowest exposure to O&G, its SP on loans were higher than peers between 3Q16-1Q17, thanks to its prudent provisioning approach to factor in the decline in collateral values. UOB’s provision coverage remained the highest at 113% vs peers’ 100-101% as at 2Q17.

UOB’s general provision (GP) buffer was also higher at 1.2%, vs peers’ 1.0- 1.1%. We are comforted that UOB will look to rebuild its GP buffer should SP on loans fall below 32bps. UOB is relatively more shielded than peers from any further deterioration in this space. We believe UOB is ahead of the curve in provisioning.