Construction firms' on-time payments to boost banks

For DBS, OCBC, and UOB, nonperforming loan (NPL) ratios tied to the construction sector were 0.2%-0.8% at year-end 2017.

According to Moody’s Investors Service, Singaporean companies’ improved payment performance for Q1 is positive for banks, because it reflects “a broad improvement in corporate cash flow and debt serviceability that will support banks’ asset quality this year.”

Moody’s Investors Service vice president and senior analyst Simon Chen noted that compared with a year ago, payment indicators generally improved during 2017 and Q1 2018, reflected by a decline in companies with slow payments, particularly in the construction sector, which has the poorest record of prompt payments amongst all industry sectors.

“The first-quarter 2018 improvement followed deterioration in the second half of 2017, and occurred amongst special trade contractors and building and heavy construction companies,” he added.

For DBS, OCBC, and UOB, nonperforming loan (NPL) ratios tied to the construction sector were 0.2%-0.8% at year-end 2017, much lower than overall NPL ratios of 1.5%-1.8% as of the same date.

Moody’s also noted that the manufacturing, retail, services and wholesale sectors collectively account for around 23% of total loans and continued to show a lower percentage of companies with slow payments. “This trend will support these sectors’ stable asset quality performance,” it added.

Most corporate-related asset quality issues at Singapore banks over the past three years were tied to the marine and offshore engineering sector, Chen said. “We expect global oil prices to remain at $45-$65 a barrel in 2018-19, which leads us to believe that the marine and offshore industry has passed its trough and that further spillover for Singapore banks will be manageable because many weak companies in the sector have either already defaulted or restructured their liabilities,” he added.

However, NPL ratios in this sector are expected to remain high whilst banks work out their loans with troubled borrowers.

Chen noted that operating conditions for Singapore’s construction sector have been challenging over the past two years amid subdued economic activity, a slowdown in project development, and rising operational costs. “We expect the construction sector’s gradual improvement this year because of Singapore’s recovering economy and the government’s plan to accelerate public infrastructure development, which will support banks’ stable asset quality in this sector,” he concluded.