Provisions to feature in banks’ upcoming results

Oil and gas exposure and the worsening economy the cause

ALL eyes will be on the financial results of major lenders in the week ahead, as this will provide an indication of sorts for the state of the economy.

While most banking analysts have already predicted lower earnings due to several rounds of interest rate cuts amid a global health pandemic, others have also raised concerns on the recent crash in oil prices and how this will affect banks with exposure to this sector.

To be sure, most local lenders generally have a loan book exposure of not more than 5% to this beleaguered sector.

Nevertheless, it is almost a given that there will be a surge in the level of provisions for doubtful debts that banks would have to make for their oil and gas (O&G) clients, and this will show up in the upcoming financial results.

Notably, this was already evident in the financial performance of their bigger regional counterparts, where first-quarter earnings were hurt badly by spikes in provisions due to O&G exposure, and the worsening macroeconomic environment as a result of the Covid-19 health pandemic.

Singapore’s OCBC Bank for instance, reported a 43% decline in its net profit for its first quarter of the year, blaming it partly on the surge in loan impairments it had to make for the O&G sector, as well as other allowances it had to set aside given predictions that things are set to get economically worse – before they get better.

OCBC, the second-largest banking group in the South-east Asian region, saw its total allowances go up on a year-on-year basis, from S$249mil to some S$657mil for the first quarter of this year.

Of this, some S$275mil was made for a single client which it said was “in the oil trading sector”.

Although no names were mentioned, it is believed that this client is Singapore-based oil trader Hin Leong Trading which is under great financial distress.

It has been reported that collectively, Singapore banks have a total exposure of about Us$600mil (about Rm2.6bil) to Hin Leong.

In Malaysia, CIMB Group Holdings Bhd has also been reported to have exposure to this troubled company, with exposure believed to reach over Rm500mil.

Altogether, the oil trading giant reportedly owes a total of close to Rm17bil to 23 lenders globally and has since filed for bankruptcy.

Meanwhile, another Singaporebased O&G related company, Hontop Energy (Singapore), the trading unit of a Shandong-based refiner, has also run into some financial trouble.

It has been reported that this company went into receivership earlier this year after the region’s largest bank and one of Hontop’s creditors - DBS Bank - appointed accounting group KPMG as receiver.

Sources say that CIMB Group’s Singapore unit is also a creditor of Hontop, having an exposure of over S$100mil to the company.

When contacted, CIMB said: “CIMB does not disclose or comment on specific names or clients.”

It is understood that currently, Hontop is in discussions with its banks on the management of its debts.

Whether or not CIMB has made provisions for its said links to both Hin Leong and Hontop is likely to be known soon.

Malaysia’s largest bank, Malayan Banking Bhd (Maybank), meanwhile, has been said by research outfit UOB Kay Hian to have an O&G portfolio that remains among the highest domestically, despite reducing it from a high of 4.4% back in 2016 to 2.8% now.

“In terms of loan staging profile, 70% is classified as normal, 12% is under watch list accounts, 1% under special mention and 17% impaired.

“Assuming 50% of its existing O&G loans under the watch list and special mention category were to fall into the Stage 3 gross impaired loan (GIL) category, this would lead to an estimated Rm750mil increase in potential Stage 3 O&g-related GIL.

“Ascribing a 70% loss given default (LGD), we estimate that Maybank would need to make an additional provision of Rm525mil,” says UOB Kay Hian.

AMMB Holdings Bhd’s O&G clients represent about 4% of the group’s total lending, while RHB Banking Group’s exposure to the O&G sector was 2.4% of the group’s gross loans as at end-dec 2019, down from 4% as at end of 2016.

While provisions made for the O&G sector will surely hurt profits of lenders this year, there are many other issues surrounding the banking industry that could contribute to lower earnings.

Tepid loan growth, higher credit costs, thinning margins, more interest rate cuts and stiff competition in an already extremely challenging environment are all forces to contend with.

On the flip side, analysts say local lenders today have moved into this period of uncertainty and sluggishness from a position of general stability and strength.

This is demonstrated by capital ratios which are a lot higher than they were during the Global Financial Crisis and asset quality which is much more sound.

“In terms of loan staging profile, 70% is classified as normal, 12% is under watch list accounts, 1% under special mention and 17% impaired”. UOB Kay Hian Research