Brunei banking sector to remain stable: S&P report

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BRUNEI’S banking sector is expected to remain stable despite slow economic activity as the sultanate’s strong external position and fiscal assets are shielding the economy from the impact of falling oil prices, a global ratings agency said yesterday.

Standard and Poor’s (S&P) said in its latest Banking Industry Country Risk Assessment (BICRA) report the economic buffer stemmed from the accumulated wealth by the oil and gas exports over several years.

“We expect banks’ asset quality to deteriorate because of slow economic activity and reliance of borrowers on the government and the oil and gas sector via employment or business contracts,” S&P said.

The agency also classified the trend for Brunei’s banking industry risk as “stable” with local banks expected to fill space vacated by some foreign banks.

S&P gave Brunei a six out of 10 in its BICRA group score along with Turkey, Guatemala, Uruguay, Italy, Thailand, Iceland and Ireland.

S&P used its BICRA economic risk and industry risk scores to identify a bank’s anchor which is the starting point in assigning an issuer credit rating.

The anchor for banks operating only in Brunei is BB+.

“The banks are likely to maintain their substantial deposits from a wealthy government and its related entities and the retail sector,” the ratings firm said.

However, declining oil prices have also led to fiscal deficits, diminishing the country’s economic prospects in the next two years.

Brunei’s real gross domestic product (GDP) growth has been negative since 2013 due to a combination of subdued production, refurbishment of oil facilities and lower global oil prices.

“We expect low energy prices could further hurt Brunei’s growth prospects. We project growth to rebound meaningfully by 2017 only as energy prices recover mildly,” S&P said.

As for the banking industry, Brunei’s regulatory standards lag international standards despite steps to tighten regulation and oversight.

“Banks have sizable exposure to personal loans, construction and real estate loans, and client concentration. This heightens credit risk in the economy, in our view,” S&P said.

Credit growth is also expected to be modest owing to limited lending opportunities.

S&P said credit growth has been in the low single digits on average in the past decade with an expected growth of three to six per cent in the next few years.

The agency added that lending opportunities to the private sector are limited as the oil and gas sector dominate the economy.

As of September 2015, loans and credit cards account for 26 per cent of loans processed by the retail banking sector.

S&P said total debt service ratio or loan cap, which was implemented last year, will ensure a moderate growth for loans.

Government-driven petrochemical and infrastructure projects will support small and medium enterprises and the economy through contracts in the large projects.

“In our view, the government will support wholesale credit growth over the next coming years with the ratio of credit to GDP to increase marginally in the next two years,” said the agency.

S&P expects banks’ losses owing to property prices will remain low as real estate prices are driven by real demand rather than speculative or investment-centric demand.

The Brunei Times