BANKS and oil and gas companies made record provisions for bad debts in 2016 and have probably seen the worst in this aspect, at least for now.
The country’s largest bank Malayan Banking Bhd (Maybank) for instance, made provisions of RM3bil last year against RM2bil a year earlier. CIMB Group Holdings Bhd (CIMB), the country’s second largest lender, made provisions of RM2.40bil in 2016 and a lower RM2.17bil in 2015.
In terms of oil and gas related outfits which made the largest provisions, Bumi Armada Bhd had set aside some RM1.74bil in 2016 as impairment while UMW Holdings Bhd made a RM1.16bil impairment for its oil and gas businesses.
Alam Maritim Resources Bhd which is an offshore support vessel (OSV) provider for the oil and gas industry meanwhile made its highest ever provision in 2016 at RM89mil. Notably, the price of crude oil had crashed in 2014, hitting a low of US$26 per barrel in February 2016, before starting to trend up amid volatility.
Consequently, companies especially those directly linked to crude oil price had been increasing their provisions for bad debts since 2014 in light of the weak commodity price.
In the case of oil and gas firms, the link is obvious while for banks, the risk is largely tied to their clients in the oil and gas sector.
Moody’s Investors Service vice president and senior analyst Simon Chen notes that banking groups, especially those with sizable operations in South-East Asia such as Maybank, CIMB Group as well as RHB Bank Bhd recorded higher gross impaired loan ratios in 2016 from a year ago.
He points out that in terms of banks with sizeable operations outside of Malaysia, their asset quality issues were similar and were driven primarily by weaknesses in their key overseas loan portfolios, including borrowers from the oil and gas service sector in Singapore, and borrowers affected by weak operating conditions in Indonesia, Thailand and other countries.
In late 2014, crude oil price which had already been weak for some time due to an oversupply situation, crashed below the crucial US$70 per barrel level and went all the way down, dragging with it the market and locally, the ringgit which plunged to a five-year low.
With crude oil price now stabilising at around US$53 per barrel and economies still continuing to chart growth, the outlook seems to have improved a little.
CIMB group chief executive Tengku Datuk Seri Zafrul Aziz for one believes that the banking group has seen the worst in terms of provisions.
“That’s our view. We should expect to see lower provisions this year compared to 2016,” he tells StarBizWeek.
The lender’s income has been affected since the fourth quarter of 2014, mainly by loan loss provisions made on its Indonesian business which has a high exposure to the commodities sector which in turn has seen tremendous price weakness in recent years.
RHB Bank group managing director Datuk Khairussaleh Ramli says that while the bank remains cautious for this year, it expects its gross impaired loans ratio in 2017 to be better than 2016.
“Our balance sheet remains strong, as capital and liquidity are at comfortable levels, which will put us in a good position to drive value creation especially from key businesses and segments and grow with our customers, as we continue to focus on asset quality and operational efficiency.”
Earlier this week, Singapore’s DBS Group CEO Piyush Gupta told Reuters that “in the short-term, I think for most of the banking sector, the worst was seen in 2016.”
“I am beginning to see some level of activity pick up that should put some more life into this industry,” he was quoted as saying.
Reuters reported DBS had earlier this month registered a 9% fall in quarterly profit and booked higher provisions for bad loans, caused by debt payment woes in Singapore’s oil services sector.
However, not all CEOs are as optimistic.
Singapore lender Oversea-Chinese Banking Corp has said that the “stress situation is going to continue.”
“We need to see oil above US$60 per barrel on a sustainable basis to trigger the oil majors to go out and explore, and for the charterers to enter into longer term vessel chartering contracts,” OCBC CEO Samuel Tsien was quoted as saying recently.
Alam Maritim managing director Azmi Ahmad says whether the worst is over or not for the firm, is not clear at this point.
“Moving forward, it will depend on our vessel utility rate, if it is below 50%, we need to provide again.” Its utilisation rate is now at 52%.
Analysts say 2016 was anticipated as the year for oil and gas players to clean up their books because of the sluggish oil markets.
“Upstream activities in 2016 continued to slow as capital expenditure fell. Some oil and gas companies underwent receivership owing to their inability to service debts, while some were forced to merge. The ultimate aim was to survive the cyclical downturn, be lean, resilient and manage risks expectations,” says an analyst.
Among oil and gas firms, Bumi Armada reported a larger loss of RM1.29bil in the fourth quarter ended Dec 31, 2016 following a non-cash impairment of RM1.1bil on several assets.
The company, controlled by tycoon Ananda Krishnan, reported a loss of RM1.29bil for the fourth quarter, which resulted in a full-year loss of RM1.9bil.
Also making a huge provision in the recent corporate earnings season was UMW Oil & Gas Corp Bhd (UMW-OG), which made a RM780mil impairment in the fourth quarter of 2016.
Hong Leong Investment Bank notes that FY16 was a dismal year for UMW-OG with rig utilisation averaging lower than 35% throughout the year and charter rates hitting an all-time low. In that year, the average daily charter rate was at US$82,000 per day, far from the US$151,000 a day rate, back in 2014.
At the parent level, UMW Holdings Bhd undertook a massive kitchen-sinking exercise with an impairment of RM1.16bil on its listed and unlisted oil and gas assets.
The impairment resulted in the group taking a big hit in the fourth-quarter, recording RM1.57bil in net losses, believed to be among the biggest quarterly loss in its corporate history.
According to AmInvestment Bank Bhd, based on its coverage of eight stocks in the oil and gas sector, Q4’2016 impairments rose 46% year-on-year to RM2.5bil, bringing total 2016 impairments to RM3.6bil.