FOLLOWING the winding up of Singapore-based oil and gas offshore service contractor Swiber Holdings Ltd, concerns are growing about the exposure of Malaysian banks to the local oil and gas (O&G) sector as the city state is regarded as a bellwether of the region’s economy.
A winding-up application by an established player in the region’s O&G sector sends out a warning that things may not be healthy as well within the local industry, which contributes about 20% annually to the Malaysian government’s budget.
Surprisingly, despite the industry’s size and large contribution to the economy, analysts covering the banking sector say the O&G sector only makes up about 2% of the outstanding loan portfolio of local banks.
“The exposure of local banks to the O&G sector is not too big; about 2% on average, although some banks have close to 4%,” Keith Wee Teck Keong, a banking sector analyst with UOB Kay Hian, tells The Edge. “The current situation will not pose a systemic threat to the banking industry. However, we do foresee some immediate to mid-term impact on the banks’ earnings, because those loans are chunky.”
This is especially so for RHB Capital Bhd and Malayan Banking Bhd (Maybank), following their exposure to Swiber-related securities. UOB Kay Hian estimates a 12% negative impact on RHB’s earnings for the financial year ending Dec 31, 2016 (FY2016) and a 3% decline for Maybank’s earnings for the same period.
UOB Kay Hian notes that it is still early days for O&G-related loans to be restructured and rescheduled (R&R). Having said that, there is significant upside risks for O&G-related loans to be classified as non-performing, thus impacting banks’ earnings.
The research house says in an Aug 10 note that O&G-related gross impaired loans ratio of banks with relatively high exposure to the sector is currently hovering at a manageable 3% to 5%, with most of them coming from overseas O&G-related loans.
However, UOB Kay Hian also foresees the situation worsening for Malaysian banks with regard to O&G-related gross impaired loans ratio. It forecasts the ratio to increase from the current 4% to a peak of 12% in the first half of 2017.
Banks under UOB Kay Hian’s coverage with high exposure to the O&G sector include AMMB Holdings Bhd, with O&G-related loans at 4% of total group loans, Maybank (3.5%), Affin Holdings Bhd (3.0%) and CIMB Group Holdings Bhd and RHB (both 2.7%).
On average, Singapore banks’ exposure to the O&G sector is higher at 6%, says Wee.
However, the currently lower exposure of Malaysian banks to the O&G sector should not be taken for granted. Some of the large O&G heavy asset owners in Malaysia have sizeable overseas contracts, where termination risk is perceived to be higher.
“A fair share of O&G-related loans domestically is likely to undergo the R&R process that will then be reflected in higher non-performing loan (NPL) formation,” UOB Kay Hian analysts Wee and Kong Ho Meng state in the Aug 10 report.
Among the O&G companies with high gearing and deteriorating operating cash flow are UMW Oil & Gas Corp Bhd, Dayang Enterprise Holdings Bhd, Perisai Petroleum Teknologi Bhd, ICON Offshore Bhd and Daya Materials Bhd, the analysts say.
Maybank is a principal banker for all the abovementioned companies, while AMMB and RHB appear as a principal banker for four and three of them respectively, says the report.
CIMB and RHB both declined to comment on the issue, while Hong Leong says it is now in the “black-out period” as the group will announce its second-quarter results in two weeks’ time. Questions emailed to Affin and AMMB remained unanswered at press time.
Maybank also declined to comment on forward-looking matters, as the group is about to release its second-quarter financial results soon. However, its spokesman provided a glimpse of Maybank’s loan exposure to the energy sector.
“As at March 2016, Maybank’s total financing to the energy sector (which includes loans relating to crude oil, natural gas, electricity, steam and nuclear fuel, solid, liquid and gaseous fuels as well as independent power producers) stood at 2.15%.
“The group NPL of this sector was 0.11%, based on the group’s total gross loans,” said the spokesman.
UOB Kay Hian estimates that Maybank’s domestic O&G loans amount to RM10.3 billion, the largest among Malaysian banks under its coverage. To put it into perspective, the total net debt of Bursa Malaysia-listed O&G engineering and marine service companies stands at RM31.66 billion, according to AbsolutelyStock.com.
Still, Maybank’s domestic O&G loans are less than those of any Singapore bank.
According to Jonathan Koh, a banking analyst with UOB Kay Hian in Singapore, DBS Group Holdings Ltd’s loans to the O&G sector total S$20 billion, or almost RM60 billion. The banking group has the highest exposure to O&G-related loans among Singapore banks, at 6.9% of its total loans.
Oversea-Chinese Banking Corp Ltd’s loans to the O&G sector amount to S$12.6 billion (RM37.8 billion) and United Overseas Bank Ltd’s to S$9.3 billion (RM28 billion).
On Aug 10, CIMB Research downgraded Singapore banks to “underweight” from “neutral”, noting that negative sentiment from worsening asset quality is likely to result in an overhang of the banks’ share price, despite the already depressed valuations.
“Concerns about asset quality and net interest margins are likely to cap upside to share price. The second quarter was a glimpse of what is to come — net interest margins started to see pressure from lower rates while asset quality deteriorated amid chunky non-performing loans.
“We think these trends will continue to play out and worsen going into the second half of 2016,” says Jessalynn Chen, CIMB Research’s banking sector analyst in Singapore, in a sectoral report.
From the looks of it, Swiber’s winding up is the harbinger of things to come for the O&G and banking sectors in Singapore and Malaysia. While a full-blown financial meltdown might not be imminent, further provisions may be required, hurting the banks’ earnings in the short term.
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