- Unknown oil and gas exposure. With the recent plunge in oil prices, this has raised the question about the total loans extended to the oil and gas sector for the banking industry.

- Mining loans looks small, at only 0.7% of total loans... Looking at loans by sectors, we understand that some banks classify loans extended to the oil and gas companies under mining. This looks small for the industry, at only RM8.6bil, or 0.7% of the total industry loan of RM1,309.6bil.

- ...but may not fully reflect total loans extended to the oil and gas sector. However, we believe this does not fully reflect the full extent of loans extended to the oil and gas sectors.

- Selected listed oil and gas companies’ total gross debt already amounted to RM28bil or 2% of total loans. If we are to delve deeper into some selected oil and gas companies, we find that the total net debt of these companies would have totalled about RM28bil, or about 2% of the total industry loans.

- Thus, some loans may fall under different classification. We believe some of these may therefore be classified under different sectors, for example electricity, gas and water (1.0% of total loans), and possibly construction (4.2% of total loans). In terms of loans by purpose, we believe this may fall under working capital purposes. The working capital segment makes up a significant 23.4% of total loans.

- AFG, HLBB and PBB are likely to have minimal exposure. In a nutshell, total loan exposure to the oil and gas industry may not be as minimal as the 0.7% suggested by just extracting the mining loan exposure. We believe though that Alliance Financial Group (AFG), Hong Leong Bank (HLBB) and Public Bank (PBB) have minimal exposure to this sector.

- Maintain Neutral. All in, we remain cautious on the banking sector, as we expect credit costs to rise ahead on the back of sporadic large impairment, and possibly higher consumer impaired loans with major retrenchments already announced for the airline and media industry. There is now additional uncertainty, given that there may be impact on smaller vendors and suppliers down the value chain for the oil and gas industry.

Source: AmeSecurities