Moody's: Global banks' credit risks to low oil prices rising

The deepening oil price slump will intensify pressure on banks globally, with those in major net oil exporting countries most exposed to credit risks in the near term, said Moody's Investors Service.

In a new report on global banks' credit risks from falling oil prices, Moody's said there is a substantial risk that any price recovery may evolve much more slowly in the medium term, noting there is some risk that prices could fall even further.

The WTI crude oil traded at US$31 (about RM130) per barrel and the Brent at US$33 (about RM134) per barrel.

Last month, the ratings agency reduced its forward-looking price estimates in light of continued oversupply and tepid demand growth in global energy markets.

Moody's said in a statement it expects the credit risk for banks in regions which are net oil-exporting will increase as their direct and indirect exposures to low oil prices raise the potential for asset quality deterioration.

Still, the ratings agency said that while implications of lower oil prices for global banks' earnings and solvency appear broadly manageable, low oil prices could still test the creditworthiness of some banks across its global rated portfolio.

"We believe the "lower-for-longer" scenario for oil prices is the base case scenario, and expect that banks in oil-exporting regions will likely see increased risk to creditors as banks adjust to this new normal," said Moody's managing director Frederic Drevon.

Moody's noted that banks' corporate lending exposures and capital markets-related activity and exposures could drive downward pressure on their credit profiles, particularly banks in net oil exporting regions.

Moody's analysts also stressed that a decline in consumer spending or pressure on Gross Domestic Product (GDP) growth driven by low oil prices could result in pressure on banks' asset quality and earnings.

However, it said banks in countries where the oil industry is largely government-owned and are reliant on oil-related revenues might be less exposed to loan delinquencies given government support to the industry.