Are Singapore banks' NPL woes finally over?

Government support to O&G firms brought some respite.

DBS Vickers Securities notes that the bulk of the NPL issues is behind us, but there are still lingering concerns. The Ministry of Trade and Industry announced enhanced support measures for the oil and gas sector in the form of new incremental loan facilities from SPRING Singapore and IE Singapore to Singapore-based industry players.

"We believe this has brought some relief to companies which are experiencing tight cash flow, and hence extend some respite to banks in terms of NPL incidences. However, we remain watchful on some spillover effects to the construction sector and loans to individuals in the near term should the macro environment remain sluggish and unemployment levels become a concern," says the firm.

As such, credit costs may remain relatively elevated in FY17 (vs 5-year historical trends) albeit lower than FY16’s. Possible earnings surprises could emerge if asset quality recovers quicker than expected in FY17. Every 5bps decline in credit cost will lift earnings by 3%.