OREANDA-NEWS. Singapore banks' 2Q16 results showed pressure on profitability and asset quality, but credit profiles should remain resilient despite the weaker operating environment, says Fitch Ratings. We believe the banks have sufficiently strong loss-absorption buffers to withstand rising, cyclical global risks. Singapore banks enjoy steady funding and liquidity profiles and strong capitalisation.

We expect a modest increase in the NPL ratios for the three local banking groups - DBS Group Holdings (DBS, AA-/F1+/Stable), United Overseas Bank Limited (UOB, AA-/F1+/Stable) and Oversea-Chinese Banking Corp (OCBC, AA-/F1+/Stable). The weighted-average NPL ratio for these three banks remained low at 1.23% at end-June 2016, compared with 1.11% at end-March 2016 and 1.06% at end-2015.

Moderate asset-quality stresses continued to emerge in the 2Q16 results. These were more apparent at DBS which was more heavily exposed to Swiber Holdings, an oil and gas services provider that filed for creditor protection in July. DBS classified SGD651m (USD482m) of Swiber exposures as non-performing in 2Q16, and set aside reserves of SGD400m. The bank's total exposure to the troubled group stood at SGD721m at end-July (1.9% of common equity Tier 1 at end-June 2016) and DBS will classify the outstanding SGD70m exposure as an NPL in 3Q16. DBS's management believes its provisions for Swiber are conservative, and foresees some write-back in the future. Fitch feels the bank's loan-loss reserve policies are generally sound.

UOB says it will classify its Swiber exposure as a NPL in 3Q16, but the bank's ultimate Swiber provisions might be low - given the high level of collateral held against these risks. OCBC has indicated that it has no exposure to Swiber.

We expect the banking sector's oil and gas loans to remain vulnerable amid weak sector fundamentals. However, we believe the rated Singapore banks are positioned well to meet rising credit risks from stresses in the sector because capital buffers are strong and underwriting procedures are disciplined.

According to the three rated Singapore banks, they had a combined oil and gas exposure of SGD51bn at end-June 2016, which represented 47% of the banks' combined equity at end-June 2016. Total exposure to the more troubled support services sector, which has been badly hit by falling demand, amounted to SGD17bn or 15% of the banks' combined equity. These latter exposures mostly tend to be secured.

We believe operating conditions are likely to remain challenging in the near term. Oil and gas-related NPLs - arising either through loan restructuring or other forms of stress - are likely to increase if crude oil prices remain depressed, while less efficient and more highly leveraged borrowers will become increasingly vulnerable the longer the current economy remains lacklustre.

Nonetheless, we think the three local banks can face additional macroeconomic headwinds in light of their strong and liquid balance sheets, sound lending practices and adequate profitability. Loan-loss reserve cover was reasonably strong at a weighted average of 113.3% at end-June 2016.

The banks' fully loaded Common Equity Tier 1 ratios range from 12.2% to 13.4%, supported by adequate internal capital generation, slower risk-weighted asset growth and - for DBS and UOB - active scrip dividend schemes. Our internal stress tests show that Singapore banks' sound capital buffers should enable them to weather a significant deterioration in credit quality. Funding and liquidity positions are also sound. The average Singapore dollar liquidity coverage ratio (LCR) for the three banks was higher than 200% for 2Q16, and the all-currency LCR averaged 138%. The banks reported comfortable Singapore dollar loan-deposit ratios, ranging from 85% to 94% at end-June 2016.