BANKS are becoming increasingly wary of lending to the beleaguered oil and gas sector (O&G) amid an environment of slowing income and rising costs.

Struggling with the lowest oil price seen in over two decades coupled with a global health pandemic which has helped cripple demand for the commodity, oil producers and other oil-related companies are being hit from all corners.

On April 21, there occurred what is now being described as an “epic oil crash” which sent the West Texas Intermediate - a benchmark in oil pricing - to a never-before-seen negative territory.

Analysts say the extra caution on the part of banks is a given and lenders at this stage, would have probably already made provisions for doubtful debts on loans they had previously given out to such firms.

“As such, expect to see an uptick in banks’ provision numbers in the coming quarters which will affect income levels, ” says one.

CIMB GROUP HOLDINGS BHD says the group has raised its level of caution and increased monitoring for the O&G sector from a few years ago.

“The group’s exposure to the O&G sector is not significant relative to total loan book. The exposure is predominantly linked to regional state-owned oil companies, ” the bank tells StarBizWeek.

To be sure, CIMB was recently reported to have exposure of up to RM500mil in financially-troubled Singapore-based oil trader Hin Leong Trading (Pte) Ltd.

The bank which says its biggest exposure is not oil and gas but residential property and adds that it “continuously monitors all exposures including oil & gas and will make the appropriate decisions on provisions where necessary for any impairments that may occur.”

AMMB HOLDINGS BHD group CEO Datuk Sulaiman Mohd Tahir meanwhile says in line with the banking group’s strategy to “optimise” its exposure to the O&G sector, clients from the sector represent about 4% of the group’s total lending portfolio.

“Given the group’s stringent underwriting, our focus has been our current portfolio.

“We have not taken on much additional exposure in years and have chosen to be selective, focusing only on robust clients, ” Sulaiman says.

Nevertheless, at 4% of total portfolio, AMMB could possibly have one of the largest exposures to this sector among local lenders.

“A majority of our exposures have been assessed as moderate risks, if not lower. Some 91% of our oil and gas exposures are rated strong to very strong with the remaining rated moderate, “ says Sulaiman.

In the case of RHB Banking Group, the bank says based on its risk acceptance criteria, RHB’s exposure to the sector has been on a downtrend over the last few years.

“And we do not have exposure to oil trading companies, ” it tells StarBizWeek in reference to the recent Hin Leong saga.

Its exposure to the oil and gas sector is 2.4% of the group’s gross loans as at end-Dec 2019, down from 4% as at end of 2016.

RHB’s biggest exposures currently revolve around the finance, insurance, real estate as well as wholesale, retail trade and restaurant sectors.

“We perform regular industry reviews to proactively manage our credit portfolio across multiple sectors, including oil and gas.

“In addition we stress test the respective sectors of credit portfolio based on certain scenarios to assess its impact, ” says the lender.

In a report last month, UOB Kay Hian Malaysia Research pointed out that the biggest bank in the country, MALAYAN BANKING BHD (Maybank) has an oil and gas portfolio that remains among the highest domestically, despite reducing it from a high of 4.4% back in 2016 to 2.8% now.

“In terms of loan staging profile, 70% is classified as normal, 12% is under watch list accounts, 1% under special mention and 17% impaired.

“Assuming 50% of its existing oil and gas loans under the watch list and special mention category were to fall into Stage 3 gross impaired loans (GIL) category, this would lead to an estimated RM750mil increase in potential Stage 3 oil and gas related GIL.

“Ascribing a 70% loss given default (LGD), we estimate that Maybank would need to make an additional provision of RM525mil, ” according to UOB Kay Hian.

Maybank declined to comment.

Mitigating impact

In the midst of being cautious on lending, banks are also keeping an eye on their cost-to-income levels, which reflect their efficiency levels.

Some years ago, most local lenders acted cohesively in cutting jobs and closing down some overseas operations to ensure they remained competitive.

In the current environment where business has slowed down considerably, the issue of cost has again come in focus.

Most say that cost-to-income levels will rise.

“Lower income is expected in 2020 and the cost income ratio will likely rise, ” CIMB says.

The lender says it is implementing “strict” costs controls across all of its operations in the region.

RHB also believes that over the near-term, its cost-income-ratio may rise.

To this, it says it is “actively exploring ways to generate cost savings and mitigate the impact.”

“Return on equity is mainly a function of our profitability and we do see headwinds in this regard but it’s a bit too early to be definitive, ” says the bank.

https://www.thestar.com.my/business/business-news/2020/05/02/banks-cautious-about-og-sector