Is a cascade of defaults on the horizon for Singapore banks?

Cross-transaction among O&G firms are making traders jittery.

Many traders feared that Swiber’s collapse could trigger a “cascade of defaults” on back of cross-transactions amongst oil and gas (O&G) firms on top of threats from “unknown unknowns.”

However, UOB Kay Hian asserts in a report that there has been no “cascading default” thus far.

“We agree that asset quality remains under pressure. However, it has been more than a month since Swiber filed for judicial management on 29 Jul 16 but another major default has not materialised,” the report noted.

Meanwhile, DBS remains in the doghouse. UOB Kay Hian stated that DBS’ pro-business and pro-growth disposition creates a perception that the bank takes on higher risk to achieve performance targets. Things may turn around for DBS, though, of non-performing loan (NPL) formation during 2H16 is lower than expectations, or if there are meaningful strides in Swiber’s recovery.

For OCBC, signs point that the bank’s conservative approach to recognise NPLs early is working. OCBC also has a pipeline of loans for upgrade after customers made timely repayments over 6-12 months. Therefore, the deterioration of its asset quality would be mild compared with peers as NPL formation is partly mitigated by upgrades.

UOB boasts the least exposure to the O&G sector, as loans extended to the sector amount to to S$9.3b or 3.9% of total loans. This stands in contrast to DBS’ S$20b (6.9% of total loans) and OCBC’s $12.6b (6.1% of total loans). UOB is thus more resilient and well positioned to weather the current credit cycle.