KUALA LUMPUR, May 21 -- The unprecedented plunge in oil prices since March 2020 is adding to asset risks for banks in Singapore, Malaysia, Japan and South Korea as they simultaneously cope with the consequences of the COVID-19 outbreak, said Moody's Investors Service.
Vice president and senior credit officer (financial institutions group) Eugene Tarzimanov said banks in these countries have the largest exposure to borrowers affected by changing oil prices in Asia.
"Although they are better positioned against this crisis than during the previous downturn of 2014 to 2015 given their reduced exposure to such borrowers, the stress in the oil and gas industry is compounding asset risks for banks amid increased challenges in numerous other sectors affected by the coronavirus," he said in a statement.
He said Singaporean banks have extensively provisioned for exposures to the riskiest oil and gas companies, but risks still linger as evident by the default of major oil trading company Hin Leong Trading last month.
For banks such as DBS Bank Ltd, Oversea-Chinese Banking Corp Ltd and United Overseas Bank Ltd, he said about four to six per cent of loans were to oil and gas companies at the end of 2019 while their exposure to Hin Leong equaled three to five per cent of pre-provision income for 2019, which is a manageable amount.
On another note, he said Malaysian banks have already re-classified a large share of their exposure and cut lending to the sector.
He cited Malayan Banking Bhd as example, which share of oil and gas loans declined to below three per cent at the end of 2019 from about 3.5 per cent two years earlier, narrowing the pool of potential new problem loans.
“That said, they can still suffer fresh impairments as low oil prices further strain financials at such borrowers,” said Tarzimanov.
As for Japan's three megabanks – Mitsubishi UFJ Financial Group, Sumitomo Mitsui Financial Group, and Mizuho Financial Group – exposure to North American independent oil sand and shale oil exploration and production companies poses the greatest risk for them, he said.
The analyst said the financials of upstream companies will worsen due to low oil prices, leading to a deterioration of asset quality and increases in credit costs at these banks.
Meanwhile, he said, South Korean banks are indirectly exposed to the impact of low oil prices via shipbuilding and construction sectors.
He said companies that build gas and oil vessels, or offshore oil plants, are susceptible to declines in oil prices, and banks in the country have some exposures to these sectors.
In China, the asset risks for commercial banks from exposures to the oil and gas sector are limited, but the collapse of oil prices has caused reputational damage for banks selling structured products linked to oil prices, said Tarzimanov.
“Apart from reputational issues, the situation has no material credit implication for the banks,” he added.
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