SGX Market Updates

Oil Price Gyration – What does this mean for Singapore Banks?


PUBLISHED ON |

23 April 2020

  • Oil prices expected to remain volatile on oversupply and concerns of COVID-19 impact on the global economy. WTI at US$14/bbl and Brent US$20/bbl. Banks in Singapore and overseas have significant exposure to the oil & gas sector. 

  • ESG, MPA and MAS issued joint release saying that banking sector remains sound and is closely monitoring liquidity and credit conditions. Singapore banks’ NPL ratios have stabilised at 1.5% at end 2019 results, vs. average of 1.7% in end 2017.

  • Singapore banks saw stronger FY19 capital positions with higher average leverage ratios of 7.5% and average ROE of 11.9%, higher than average of diversified banks across developed markets (US, UK, Australia, Japan and HK) of 6.2% and 10.7% respectively.




WTI Crude Oil hit negative territory (-US$40/bbl) due to unique nature of its contract

Monday evening on 20 April was historic for US benchmark WTI crude oil as prices plunged over 300% into negative territory (as low as -US$40/bbl), hitting lowest levels in history as traders dumped the May futures contracts ahead of expiry due to a lack of available storage.

The WTI contract’s unique nature is that it is a deliverable future which delivers into landlocked storage facilities at Cushing in the US. Once tank levels are full, there is nowhere else for the oil to go. Brent crude oil – OPEC international benchmark – ended the day around US$25/bbl.

Oil traders and refineries in Singapore typically use Brent instead of WTI, however, ongoing concerns of a global oil supply glut remain in focus. Brent dipped 55.0% in March on the back of the Russia-Saudi Arabia oil price war as parties fail agree on production cuts. Brent is US$20.37/bbl while WTI is US$13.78/bbl (as of 22 Apr 2020).

Oil prices may continue to remain volatile as noted by analysts, driven by an oversupply and concerns of COVID-19 causing a global economic slowdown and recession.



ESG, MPA and MAS: Banking System Remains Sound

Enterprise Singapore (ESG), Maritime and Port Authority of Singapore (MPA) and Monetary Authority of Singapore (MAS) issued a joint statement post a bankruptcy filing by Singapore oil giant Hin Leong. It said that Singapore’s oil trading sector “remains resilient notwithstanding the challenges posed by the drop in global demand for energy” and is “sufficiently diversified” with over 130 companies globally that trade these products –  reinforcing that Singapore remains an important regional storage, blending and distribution hub for refined oil products.

MAS also said it is in close contact with banks on developments related to Hin Leong and that banks are well capitalised and diversified in exposures to these sectors. MAS is also closely monitoring liquidity and credit conditions in the market.



Oil giants Hin Leong and Ocean Tankers file for bankruptcy

Singapore oil giant Hin Leong Trading and Ocean Tankers have reportedly filed for bankruptcy protection. According to a Reuters report, Hin Leong suffered US$800 million in futures losses over the years but were not reflected in the financial statements. Banks in Singapore and overseas have significant exposure to the oil sector – Hin Leong reportedly owes US$3.85 billion to more than 20 lenders, including DBS, OCBC and UOB with a combined exposure of at least US$600 million (read more).

Creditors of the oil & gas sector will be indirectly impacted by key developments of the sector such as price volatility and credit risks.



Singapore banks note stronger FY19 capital positions and lower NPL ratios

Singapore banks averaged -2.9% price change over the past week, while oil prices declined close to -30%. Based on FY19 results, Singapore banks’ non-performing loan (NPL) ratios have stabilized at 1.5% at end 2019 results, vs. average of 1.7% in end 2017. DBS cited healthy coverage allowance, OCBC reduced its oil & gas NPL from 0.9% to 0.8% (QoQ), while UOB noted no widespread concern despite higher non-performing asset (NPA) formation.

Earlier in 2017, banks have actively reduced NPL ratios and exposure to oil & gas industries:

  • DBS accelerated recognition of residual weak oil and gas support services in 3Q17, NPL was at 1.7%

  • OCBC’s 4Q17 NPL at 1.5%, NPA increased mainly from downgrade of offshore support vessel exposures

  • UOB in 4Q17 accelerated recognition of NPA for oil & gas and shipping sectors, NPL increased to 1.8%



DBS OCBC UOB Non-Performing Loan


According to the FY19 financial statements, DBS, OCBC and UOB have 8.7%, 5.0% and 4.1% exposure to the transport, storage and communication sector respectively. While DBS has the highest exposure to the sector at 8.7%, this is lower than 9.3% at end 2017. Oil and gas bank loans are classified under this sector category.



Singapore banks’ loan exposure to transport, storage and communication sector

As end 4Q19 (S$ million) DBS OCBC UOB
Total gross loans 362,427 264,773 268,676
Gross loan by Transport, storage, communication loans (A) 31,574 13,311 11,036
% of total gross loans 8.7% 5.0% 4.1%
Total NPL 5,402 3,838 4,136
NPL by Transport, storage, communication (B) 3,099 1,563 650
(B) / (A) 9.8% 11.7% 5.9%
Total NPL / Total gross loans 1.5% 1.5% 1.5%

As end 4Q19 (S$ million) DBS OCBC UOB
Total gross loans 327,769 237,321 236,028
Gross loan by Transport, storage, communication loans (A) 30,480 11,568 9,388
% of total gross loans 9.3% 4.9% 4.0%
Total NPL 5,517 3,415 4,211
NPL by Transport, storage, communication (B) 2,824 1,277 1,209
(B) / (A) 9.3% 11.0% 12.9%
Total NPL / Total gross loans 1.7% 1.5% 1.8%

Source: Company filings for FY19 and FY17. Oil and gas loans are classified under this sector category.



In terms of balance sheets for FY19, Singapore banks noted stronger capital positions and performance, with average leverage ratios of 7.5% and average return on equity of 11.9% vs. average of diversified banks sector across developed markets (US, UK, Australia, Japan and HK) of 6.2% and 10.7% respectively. A higher leverage ratio generally means banks have more capital reserves to survive a financial crisis.

The banks will announce 1Q20 financial results and abridged financial disclosures, with DBS on 30 April, UOB on 6 May and OCBC on 8 May. Commentary and banks’ guidance on performance, credit risks, balance sheets, provisions for the oil & gas sector and market outlook will be in focus.

Name SGX
Code
Mkt Cap
S$M
2020 YTD
Avg. Daily
Turnover
S$M
2020 YTD
Total
Return
%
16Apr–22Apr
1wk Price
Change
%
P/B ROE
%
Leverage Ratio
(company
filings)
%
Div Yld
 %
DBS Group Holdings D05 47,580 172.0 -27.6 -3.3 0.94 12.8 7.0 6.5
Oversea-Chinese Banking Corp O39 37,880 78.0 -21.5 -2.8 0.80 10.9 7.7 6.1
United Overseas Bank U11 32,680 86.7 -25.8 -2.7 0.88 11.9 7.7 5.4
Average -25.0 -2.9 0.87 11.9 7.5 6.0

Source: SGX StockFacts, Thomson Reuters, Bloomberg (Data as of 22 April 2020).
Note ROE and Debt/Asset metrics can vary amongst Data providers with Bloomberg measures applied to the majority of the stocks above.



Globally, banks dividends are also in focus amidst the challenging macro environment as central banks in Europe, UK and New Zealand have suspended dividends to allow banks to maintain their capital positions. Notably, HSBC announced that it was cancelling the fourth interim dividend for 2019 and would not be paying the first three interim dividends for 2020. Locally, MAS does not see the need to restrict banks’ dividend policies.




Did You Know?

Brent and West Texas Intermediate (WTI) are two main oil benchmarks worldwide. Brent is extracted from the North Sea and cost of shipping is typically lower being near the sea while WTI is extracted from US oil fields in Texas, Louisiana and North Dakota. Shipping costs for WTI tend to be higher as it is produced in landlocked areas with limited storage facilities.




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