OREANDA-NEWS. Asset quality for the three banks listed on Singapore Exchange deteriorated marginally in the final quarter of 2015, with average non-performing loan (NPL) levels edging up to 1.1%, compared with 0.9% in the year-ago period and 1.0% in the third quarter.

For the December quarter, United Overseas Bank (UOB) reported the highest NPL ratio of 1.4%, followed by DBS Group Holdings (DBS) and Oversea-Chinese Banking Corporation (OCBC) at 0.9%.

When banks report their financial results, items that are disclosed include net profit, net interest income and net interest margins, which are found in the income statement, as well as non-performing assets, which are detailed in the balance sheet. 

A non-performing asset (NPA) is a credit facility or a debt obligation where the borrower has not paid any interest and/or principal repayments to the designated lender for a specified period of time. NPAs may be used by financial institutions to refer to loans that are in jeopardy of default.

As at 31 December 2015, DBS’s total NPAs rose 11.1% year-over-year and 9.5% quarter-on-quarter. Total NPAs at OCBC jumped 54.8% from the year-earlier quarter and 5.5% versus the previous quarter, while UOB’s NPLs rose 22.2% year-on-year and 13.0% quarter-on-quarter.

NPAs of Singapore banks include NPLs, non-bank loans, debt securities and contingent liabilities.

By industry, DBS and OCBC both saw the highest NPAs from the manufacturing sectors. General commerce, agriculture, quarrying and mining were also key contributors to NPAs for both banks. UOB saw the highest NPLs from the transport, storage and communication sector – where most of its exposure to the oil and gas sector is categorised – as well as housing loans.

By geography, greater China and Southeast Asia accounted for the bulk of bad loans across the three banks. About 31.4% of DBS’ total NPLs were from Hong Kong and rest of greater China, while 52.1% of its NPLs were from Singapore, South and Southeast Asia. For OCBC, 82.2% of total NPAs came from Singapore, Malaysia and Indonesia, while 71.9% of UOB’s total NPLs were derived from these three countries.

‘Resilient’ Asset Quality

DBS’s asset quality remained “resilient”, with the increase in NPAs led by Hong Kong, the bank said in its 22 February results statement. Allowance coverage of NPAs remained healthy at 148%. Total allowances rose 11%, while specific allowances for loans increased 15% in 2015, it added. DBS CEO Piyush Gupta said at the bank’s results briefing on the same day that the NPL ratio won’t exceed 1.3% of total lending. 

OCBC’s asset quality remained “sound”, with the increase in NPAs driven by “a few large corporate accounts associated with the oil and gas services sector”, the bank said in its 17 February results statement. Allowance coverage ratios remained at healthy levels, with total cumulative allowances at 417% of total unsecured NPAs and 120% of total NPAs, versus respective ratios of 539% and 171% as at 31 December 2014, it added.

OCBC CEO Samuel Tsien said at the 17 February earnings briefing that the bank’s NPL ratio probably won’t exceed the level of the 2008 global financial crisis. Its NPLs to the oil and gas industry represent 0.39% of total loans, and the bank faces no issues with its Greater China loan portfolio, he added.

‘No Liquidity Crisis’

For UOB, the transport sector – particularly shipping – remains “under stress” with several new large NPLs in the fourth quarter, mostly in Indonesia, the bank said in its 16 February results statement. NPLs in Singapore and Greater China increased due to loans to the manufacturing and general commerce industries, it added. Total allowances rose 5.7% YoY in 2015, and NPL coverage stayed “healthy” at 130.5% and 315.7%, after taking collateral into account, the statement said.

UOB’s NPLs may rise to 2% of total loans this year, compared to 1.4% in 2015, especially if oil prices remain low, CFO Lee Wai Fai said at the 16 February earnings briefing. Possible bad loans could come mainly from the oil and gas sector, but the bank’s exposure to the sector is “highly secured”, he added.

CEO Wee Ee Cheong said at the same event that the bank’s NPL issue is not a “liquidity crisis”. He is comfortable with UOB’s China loans exposure, and the bank’s housing loan portfolio remains “resilient”.

Looking Ahead

Singapore’s three banks have seen “a broad-based deterioration in asset quality” through 2015, a trend that is expected to continue because of Asia’s slowing growth and increasing stress for oil and gas borrowers in Singapore, Moody’s Investors Service said in an 18 February statement.

If China’s slowdown were to lengthen or deepen, their asset quality could also deteriorate further, Fitch Ratings said in a 1 March statement. Singapore banks' exposure to Greater China has increased to 25% of total loans as at end-2015 from 17% as at end-2008, it added.

Since both OCBC and UOB report large exposures to oil and gas borrowers, and given prolonged softness in the sector, Moody's expects both banks to raise their provisions in coming quarters, which in turn will pressure profits. But any material impact on their “still-solid” capital buffers is unlikely, it added.

Fitch noted that while credit stress could deepen from a extended period of low oil prices, the impact on earnings will likely be manageable.

It pointed out that oil and gas exposure for the three banks is moderate as a proportion of their overall portfolios, and often secured with moderate loan-to-value ratios, which limit the loss even with falling collateral values.

The three banks are well-prepared to weather a significant deterioration in credit quality, given their high capitalisation ratios, adequate profitability (average core ROE of 11.4% for 2015), reasonable loan-loss reserves (133% as at end-2015), disciplined funding practices and broadly liquid balance sheets, Fitch added.

DBS, OCBC and UOB have averaged a total return of minus 5.0% in the 2016 year thus far. Over a 12-month and three-year period, their dividend-inclusive total returns were a negative 16.2% and 3.6% respectively.

DBS's non-performing assets

By geography

31-Dec-15

30-Sep-15

31-Dec-14
NPLs (S$ mln) NPLs (% of loans) NPLs (S$ mln) NPLs (% of loans) NPLs (S$ mln) NPLs (% of loans)
Singapore 506 0.4 510 0.4 428 0.3
Hong Kong 433 0.8 366 0.7 265 0.5
Rest of greater China 387 0.9 320 0.7 342 0.7
South and Southeast Asia 856 3.2 867 3.2 906 3.6
Rest of World 430 1.5 408 1.5 478 2
Total NPLs 2,612 0.9 2,471 0.9 2,419 0.9
Total NPAs 2,792   2,549   2,513  
By industry (S$ mln) 31-Dec-15 30-Sep-15 31-Dec-14
Manufacturing 560 647 660
Building & construction 334 313 357
Housing loans 122 122 113
General commerce 705 495 434
Transportation, storage & communications 307 319 338
Financial institutions, investment & holding cos. 100 105 106
Professional & private individuals (excluding housing loans) 203 196 166
Others 281 274 245
Total NPLs 2,612 2,471 2,419
Total NPAs 2,792 2,549 2,513
Provisions (%) 31-Dec-15 30-Sep-15 31-Dec-14
Total allowances/NPA 148 161 163
Total allowances/unsecured NPA 303 324 296

Source: Company data

OCBC's non-performing assets

By geography

31-Dec-15

30-Sep-15

31-Dec-14
NPAs (S$ mln) NPLs (S$ mln) NPL Ratio (%) NPAs (S$ mln) NPLs (S$ mln) NPL Ratio (%) NPAs (S$ mln) NPLs (S$ mln) NPL Ratio (%)
Singapore 545 545 0.6 516 516 0.6 274 274 0.3
Malaysia 732 707 2.5 720 699 2.5 532 507 1.8
Indonesia 400 400 2.3 305 305 1.9 98 98 0.7
Greater China 241 207 0.4 244 207 0.3 185 185 0.3
Other Asia Pacific 80 80 0.7 103 103 1.0 180 180 2
Rest of World 41 30 0.3 44 32 0.3 48 35 0.2
Group Total 2,039 1,969 0.9 1,932 1,862 0.9 1,317 1,279 0.6
NPLs by industry (S$ mln) 31-Dec-15 % of loans 30-Sep-15 % of loans 31-Dec-14 % of loans
Agriculture, mining, quarrying 337 4.6 330 4.2 8.0 0.1
Manufacturing 428 3.2 449 3.5 302 2.4
Building & construction 105 0.3 107 0.3 173 0.5
Housing loans 278 0.5 281 0.5 274 0.5
General commerce 194 0.7 179 0.6 152 0.5
Transport, storage & communication 274 2.2 218 1.7 174 1.4
Financial institutions, investment & holding cos. 197 0.7 158 0.6 24 0.1
Professionals & individuals 129 0.6 122 0.5 103 0.5
Others 27 0.3 18 0.2 69 0.6
Total NPLs 1,969 0.9 1,862 0.9 1,279 0.6
Total NPAs* 2,039   1,932   1,317  
Provisions 31-Dec-15 30-Sep-15 31-Dec-14
Total cumulative allowances (S$ mln) 2,438 2,342 2,247
Cumulative allowances as % of total NPAs 119.6 121.2 170.6

Source: Company data

UOB's non-performing assets

By geography

31-Dec-15

30-Sep-15

31-Dec-14
NPLs (S$ mln) NPL Ratio (%) NPLs (S$ mln) NPL Ratio (%) NPLs (S$ mln) NPL Ratio (%)
Singapore 1,116 1.0 1,046 0.9 864 0.8
Malaysia 386 1.6 378 1.6 386 1.5
Thailand 249 2.2 238 2.1 267 2.5
Indonesia 569 4.9 372 3.4 298 2.7
Greater China 218 0.9 166 0.7 124 0.5
Others 344 1.9 351 1.9 419 2.5
Group Total 2,882 1.4 2,551 1.3 2,358 1.2
By industry (S$ mln) 31-Dec-15 NPL Ratio (%) 30-Sep-15 NPL Ratio (%) 31-Dec-14 NPL Ratio (%)
Transport, storage & communication 977 9.8 825 8.3 714 7.1
Building & construction 250 0.6 244 0.6 226 0.6
Manufacturing 287 1.8 208 1.3 280 1.6
Financial institutions 102 0.7 103 0.7 109 0.7
General commerce 388 1.4 309 1.1 265 1.0
Professionals & private individuals 287 1.1 289 1.1 209 0.8
Housing loans 550 1.0 532 1.0 507 0.9
Others 41 0.4 41 0.4 48 0.5
Total 2,882 1.4 2,551 1.3 2,358 1.2
Provisions 31-Dec-15 30-Sep-15 31-Dec-14
Total allowances (S$ mln) 4,008 3,904 3,729
As % of NPA 130.7 142.6 144.1
As % of unsecured NPA 292.8 316.4 310.5