Nonperforming loans plague Singapore banks

Even the collaterals against some of the outstandings are seeing an erosion in value

Singapore banks’ woes with oil and gas services firms has stepped up a notch. Pain from distressed loans to offshore energy companies dominated Oversea-Chinese Banking Corp’s earnings call and DBS Group Holdings Ltd said that provisions for nonperforming advances surged in the December quarter. However, the losses may start coming in a slightly different form.

It’s all about a bank’s specific allowance for bad debt, calculated by determining how much of a loan is delinquent and then netting out what a lender expects to recover by either confiscating and selling collateral or by helping the company to remain operational. DBS’s specific allowances for credit exposure in Singapore rose more than fourfold to S$184 million (Dh475.26 million) in the fourth quarter compared with S$44 million in the third.

Rules on provisioning against losses are complex, but the amount set aside depends upon where an advance falls on a scale of four — special mention, substandard, doubtful and loss.

Worry

So here’s the worry. First, the migration of loans down the scale has quickened, which helps explain the spike in provisioning. Second, net recoverable amounts are falling and it appears banks don’t yet fully understand how little they’ll actually be able to get back from their loans to distressed shipping and oil services companies. Financial institutions in Singapore are likely adhering to best practice when it comes to evaluating collateral and accounting for it when provisioning.

The Monetary Authority of Singapore suggests lenders use historical recovery values as well as expert valuations.

It’s just that the situation has deteriorated so fast that past numbers may be worthless and experts could also be looking in the rear view mirror.

Bank shareholders, brace for more pain.