Shares of one of Singapore’s major banks, Oversea-Chinese Banking Corp Limited (SGX: O39), have hit a rough patch lately. After hitting a high of $10.92 last year, the bank’s share price has dwindled by 15% to $9.27 as of last Friday. Worries around OCBC’s exposure to the struggling oil and gas industry could be one of the issues weighing on its shares. These concerns were not lost on Samuel Tsien, OCBC’s chief executive. In a recent presentation for the bank’s 2015 fourth-quarter earnings, Tsien had shared his thoughts on the subject. He described OCBC’s oil and gas portfolio from a high level before narrowing…
Shares of one of Singapore’s major banks, Oversea-Chinese Banking Corp Limited (SGX: O39), have hit a rough patch lately.
After hitting a high of $10.92 last year, the bank’s share price has dwindled by 15% to $9.27 as of last Friday. Worries around OCBC’s exposure to the struggling oil and gas industry could be one of the issues weighing on its shares.
These concerns were not lost on Samuel Tsien, OCBC’s chief executive. In a recent presentation for the bank’s 2015 fourth-quarter earnings, Tsien had shared his thoughts on the subject.
He described OCBC’s oil and gas portfolio from a high level before narrowing down to one particular area – the support services sub-sector. This troubled piece made up 47% of OCBC’s oil and gas loan exposure.
Tsien explained the current situation:
“The issue faced with that is because of the reduced oil prices, we finance the capital equipment to support the oil industry.
And when the oil prices come down, the charter rates that were previously negotiated, some of them were subject to renegotiation by the oil majors. Some of them when they come off charter, they were renewed at a much lower rate. And some of them could be off-charter for a period of time as they search for better rates.
And this situation deepened as a result of the continued drop in oil prices. So, when oil prices were US$60, typically there is no issue in the portfolio. When it comes down to US$40, there are already some issues that has come up and we are starting to address it – to make sure that we bring in the customer to renegotiate the terms so that they can renegotiate with the charterers, in a way that they can continue to deploy the vessel.”
The Brent crude oil price has certainly seen better days. This can be clearly observed from the chart below:
Over the past two years, the price of Brent crude has gone from as high as more than US$110 per barrel to under US$30 per barrel. Based on this, OCBC has taken action in the troubled oil & gas support services sub-sector. Tsien commented:
“There is no point in leaving the vessels idle. We need to have the vessels to continue to be deployed, so that they can continue to generate the cash flow.
So, we are pleased that we have done that fairly early on so that some of those vessels that otherwise would have become off charter or be renegotiated at a significantly lower rate, were able to attract a slightly higher rate than they currently can get. But it is still lower than their contractual rate.
When the oil prices start to come down to US$30, there are more oil majors requesting for renegotiation of the charters. And when the oil price starts to drop below 30% [sic], the issue has deepened. There are also compounded by the fact that some of the oil rigs which are in the shipyards, which are coming out to the market. So, from a supply side, it has actually increased as well.
So, this is the stress that we are currently seeing. Our approach towards this portfolio is to negotiate with the customer so that they will be able to continue to deploy the vessels. In the meantime, of course, should they become a negotiated restructured loan, we will classify them as NPL [non-performing loan].”
In short, OCBC appears to be more interested in keeping the vessels of its borrowers employed, rather than to take more drastic actions such as liquidating. Tsien added that the aforementioned loans were secured by the borrowers’ vessels or oil rigs. OCBC’s chief executive also commented that when the loans were originated, they were done at conservative ratios of under 70%.
However, Tsien’s main concern may lie in the oversupply situation that the market is seeing right now. If so, there may not be buyers that are willing to pay the right values for the vessels or rigs of OCBC’s borrowers.
This might be an area to watch as it develops. It is possible that there will be more special provisions taken from this area in the future if the situation persists.
For more investing insights and the latest updates about the financial world and the stock market, you can sign up here for a FREE subscription to The Motley Fool's weekly investing newsletter, Take Stock Singapore. It will teach you how you can grow your wealth in the years ahead.
Like us on Facebook to follow our latest hot articles. The Motley Fool's purpose is to help the world invest, better.
The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong doesn’t own shares in any companies mentioned.