Asian banks brace for more bad loans as commodity pressures mount

Singaporean and South Korean lenders are among the most exposed.

Oil prices have started to recover in recent weeks, but the price uptick does not mean that Asian banks are finally off the hook when it comes to deteriorating commodity-related loans. A report by Moody’s warns that non-performing assets will continue to increase in coming months, based on the expectation that most commodity prices will remain lower for longer.

Moody’s noted that commodity-related loans made up roughly 7% of gross loans as of the end of 2015.

“Such price dynamics will further dampen corporate earnings and weaken the debt repayment capacity of many commodity firms, creating pressure on or delaying the recovery of asset quality and profitability of banks in the region,” Moody’s said.

In terms of segments, Singaporean and South Korean lenders are most exposed to oil & gas related industries such as shipping and ship and rig building, where the exposure is around 5% of gross loans.

“Singapore banks are the most exposed to the oil & gas services sector, an industry that is more vulnerable to low oil prices because it is affected by the shrinking expenditures of oil majors. In Korea, policy banks are more exposed to ship and rig builders,” Moody’s said.

Meanwhile, banks most exposed to metals & mining and related sectors include Mongolian, Indian, Indonesian and Chinese lenders.

Despite heightened risks, Moody’s noted that most Asia Pacific banks have sufficient buffers against increasing commodity risks.

“Banks in general have either good financial buffers, moderate commodity exposures, or their ratings capture asset quality weakness. However, the pressure on the quality of commodity-related loans could be a contributing factor behind possible negative bank rating actions in Singapore, Korea and Mongolia over the next 12-18 months, as reflected in our negative outlooks on many banks in these systems,” Moody’s said.