Singapore banks unable to shake off default risks even as oil prices recover

Support services firms are still in deep water.

A wave of loan defaults was once feared to engulf Singapore’s largest banks if oil prices remain depressed for longer. Although default risks have eased somewhat as oil prices tick up, analysts at Morgan Stanley note that the lenders are not out of the woods yet.

“Given the nature of Singapore bank exposures to the support services sector, we believe risks remain. After all,one of the reasons crude prices have risen is an expected drop in supply – this will continue to affect support services, in our view,” Morgan Stanley said in a report.

The report highlighted that due to the current rig glut, shipbuilders are likely to see depressed contract wins even if oil prices do bounce back.

Morgan Stanley noted that major defaults for the three banks are still unlikely, although NPLs are expected to increase.

“The risk is that if the oil price falls back, then we may begin to see defaults. We have limited disclosure on the precise nature of the Singapore banks' exposures to the support service sector, however, we would estimate that c.50% of the debt outstanding is to the listed sector, with perhaps an equal, or even greater amount outstanding to the private sector,” Morgan Stanley said.

“A lot of the loans are probably secured on ships and rigs.This highlights the threat that the Singapore banks face,as a lot of borrowers are under pressure as chartering rates fall,” the report added.