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Impact of declining oil prices on banks

PETALING JAYA (The Star/ANN) — Oils sharp decline since June has left many banks looking at heavy losses and the estimated 2 billion pounds (US$3.12 billion) losses for British lenders may be just the tip of the iceberg.

US and Canadian banks that have lent heavily to the sector on the back of the US shale boom could be nursing their wounds too.

Barclays, HSBC and RBS could be sitting on losses of US$1 billion each, while Standard Chartered could face US$400 million of impairments, said the Telegraph, quoting Chirantan Barua, analyst at Bernstein.

“Nearly US$650 billion of high yield debt has been issued in the sector since 2011.

“Momentum in the sector has been strong, growing at (around 20 per cent) in 2012/13.

“When you see US$650 billion of high yield issuance in a sector that has been levering up across the supply chain, any shocks in the underlying business will have risk ripples across the financial system,” Barua was quoted as saying.

Risky high-yield debt-loans to companies that are less stable — have increased substantially in recent years on the back of more activity from smaller players, said the Telegraph.

These borrowers are seen as less likely to withstand prolonged low prices, making them more likely to default on this debt, said the Telegraph.

This is happening hot on the heels of massive fines for forex rigging and a host of other misselling and money laundering charges.

Hopefully, with increased capital input, these banks can weather through the waves.

Related: Assessing the fallout from the fall in oil prices

Singapore had earlier pledged to control household debt which had gone up to 76.3 per cent of gross domestic product (GDP) in the third quarter, compared with 71.9 per cent two years earlier.

Credit Bureau Singapore has come up with an enhanced report which will be available online, displaying a consumer’s total credit limit and total outstanding balances across financial institutions.

Since June, rules for credit cards and unsecured credit have been strengthened, requiring financial institutions to review borrowers’ aggregate credit limits and outstanding balances.

Credit reports will be enhanced further in the second quarter of next year to distinguish interest-bearing unsecured outstanding balances from non-interest bearing ones, said the Singapore Business Times (SBT).

This is ahead of new unsecured credit rules that kick in on June 1, 2015, which will prevent lenders from granting credit to borrowers whose interest-bearing unsecured outstanding balances exceed their annual income for three consecutive months or more, said SBT.

Detailed credit rules are being set out to prevent indebtedness in whatever form.

Singapore is already preparing for external volatility and besides the household sector, it is monitoring risks in its banking and corporate sectors.

In line with its vision to create 100 “smart cities” by 2020, India has eased rules for foreign investment in construction.

Under the new rules, foreign investment is now allowed in projects with a minimum built area of 20,000 sq m, down from a previous 50,000 threshold, said Reuters.

The minimum capital investment by foreign companies has also been halved to US$5 million, said Reuters, quoting a government statement.

India’s construction industry, worth an estimated US$126 billion, attracted 11 per cent of all foreign investment into the country between 2000 and 2013, the second highest of any sector, but the pace of investment has slowed in recent years, said Reuters.

Besides investment for infrastructure, India is attracting investment for construction of new hotels, housing and townships in its effort to improve living standards.

The result of all this opening up and upgrading will be seen starting five to 10 years down the road.


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