Banks going strong despite exposure to O&G sector

KUALA LUMPUR: Banks in Malaysia remain relatively resilient despite their exposure to the oil and gas (O&G) sector in the form of loans to O&G companies.

Maybank Investment Bank Bhd (Maybank IB Research) in its report noted that the most resilient banks from an earnings perspective would be Public Bank Bhd, Alliance Financial Group and Hong Leong Bank, which the research house expect to stay profitable even if there was a 100 per cent default on their entire O&G loan book.

“The banks in our coverage generally have an O&G exposure level ranging from less than one per cent of their total loan portfolio for the likes of Public Bank, Alliance Financial Group and Hong Leong Bank, to five per cent for RHB Group,” it said in the report.

“Effectively, the first three banks would remain profitable, even if there was a 100 per cent default on their entire O&G loan book. RHB would slip into the red only if 40 per cent of its O&G book turned non-performing, while the other banks such as AMMB Holdings Bhd, CIMB Group Holdings Bhd and Malayan Banking Bhd would be lossmaking if 60 per cent of their O&G book turned nonperforming.

“These are fairly high tolerance levels, in our view, given that we havealsoassumedfullprovisioning against such O&G net performing ratios.”

Theresearchfirmestimatedthat the total cumulative gross debt of the 46 selected O&G related groups amounted to RM50.7 billion as at their latest quarterly balance sheet dates, representing about 3.6 per cent of total banking system loans.

At the time of writing, the price per barrel of Brent Crude has declined 10 per cent year to date in 2016 to US$32.28. This is down 75 per cent from its post-Greece Financial Crisis (GFC) peak of US$128.40 back in March 2012, Maybank Research said.

“The price per barrel of WTI is now below US$30 at US$29.44, having sunk 21 per cent to date and it is also down 74 per cent from its post-GFC peak of US$114.83 back in August 2011.

“With the plunge in oil prices, O&G projects have been shelved, margins have fallen and O&G companies have struggled to adapt to this new environment which has been shaped by capex cuts, cost rationalisation and cashflow preservation,” it observed. “For O&G service providers, optimising asset utilisation over profitability has been, and continues to be a key priority.

“Taking a look at the latest net gearing levels of listed O&G-related players, what is comforting is that the balance sheets of most of these groups are relatively healthy.

“That gearing levels in the O&G industry are higher than that of most other industries is not surprising, given the capital intensive nature of most of the businesses, particularly that of the vessel operators.

“Nevertheless, what is positive is that there are just five groups out of our list of 46, that have a net gearing level of more than one time.”