20% of UOB’s exposure to the oil & gas sector vulnerable to potential impairment

That is if oil prices remain depressed.

UOB reported a net profit of SGD 788m in 4QFY15. Full year net profit came in at SGD3,209mn, 1.2% lower compared to 2014 (SGD3,249mn).

According to Yuxuan He, analyst at KGI Fraser Securities, NPLs for the bank rose 22.2% yoy (13.0% qoq) to SGD2.8bn as the bank recorded several new large NPLs, mainly in Indonesia.

NPLs in the troubled “transport, storage and communication” industry (where some of the oil & gas exposures are classified under) continued to rise, with NPL ratio hitting 9.8% in 4QFY15, up from a ratio of 7.1% a year ago.

Meanwhile, Maybank Kim Eng analyst Ng Li Hiang notes that of the bank’s SGD21b exposure to commodities, SGD12b is to the O&G sector. UOB’s own stress test showed a further 20% (~SGD2b) is vulnerable if oil prices stay low.

“We suspect that the stress tests are linear in nature and should a confluence of low commodity prices, a larger scale credit event and prolonged bleak economic outlook occur, defaults could be much higher,” Ng adds.

Should we be concerned about UOB's exposure to the oil and gas sector?

Yuxuan He – KGI Fraser Securities
While UOB’s loan exposure to the commodities (inclusive of oil & gas) sector accounts for only 7% of its total loans, the bank has identified that ~20% (~SGD2.4bn, including contingents) of its total oil & gas sector’s exposure may be vulnerable to potential impairment if oil prices continue to stay depressed.

While the bank has guided for a credit cost of 32bps for 2016, we assume a higher credit cost of 35bps to account for potentially higher provisions in 2016, given our house view that the oversupply in oil may persist well into the year.

RHB
UOB has total exposure of SGD12.1bn to the oil & gas (O&G) industry as at Dec 2015. Management is concerned about the bank’s exposure to the upstream industries but believes that asset quality would remain manageable and exposures are well collateralised.

Management estimates about SGD2.0bn of exposure would be vulnerable should oil price stay low for >1 year and this would push credit cost to 40 bps (FY15: 33 bps).

Ng Li Hiang – Maybank Kim Eng
UOB has SGD21b of exposure to commodities, of which SGD12b is attributable to the O&G sector (~57% of total exposure), with SGD5b exposure to upstream and SGD7b to downstream/traders.

Management cited that around 20% (~SGD2b) of O&G exposure is vulnerable, attributed 50% each to SME and large corporates segments. Provisions have not been made in NPLs/SP, posing more risk if more O&G players default.