Banks will suffer prolonged agony from O&G exposure for another 2 quarters

Bad loan ratio is likely to hit 20%-50%.

The recent oil & gas sector fiasco continues to take its toll on banks, with their asset quality likely to still get pressured for at another two quarters.

According to UOB analyst Jonathan Koh, after a stress test on banks' earnings and target prices, asset quality for (offshore and support services) OSS will dramatically deteriorate in the second half of the year and (non-performing loans) NPL ratio for OSS will reach 2O%-50%.

The stress test was based on NPL ratio in the vulnerable offshore support services (OSS) segment within the O&G sector, as well as correction in collateral values.

"Our stress test indicates current share prices imply DBS’ and OCBC’s NPL ratios for OSS would hit 40-50% and valuation for collaterals would decline by a massive 70-80%," Koh said.

More so, the analyst argued that banks set aside specific provisions for the amount not covered by the recovery from collaterals in 2H16.

"For example, a loan of S$30m was extended to purchase vessels worth S$50m. The vessel owner defaulted. Banks would need to set aside specific provisions of S$20m if the vessel was disposed at S$10m, assuming a decline of 80% in the valuation of collateral," he explained.

With this, Koh deemed that the banks are in a fragile state due to a slower global growth.

"Banks faces risk from deterioration in asset quality from the O&G sector. In addition, sentiment remains fragile due to slower global growth and geopolitical uncertainties relating to the aftermath following Brexit and the US presidential election," Koh said.