Banks in Brunei Darussalam have so far weathered the impact of falling oil prices, winning plaudits from credit rating agencies for their resilience and stability.
Credit ratings agency Standard & Poor’s (S&P) said in early March that the Sultanate’s strong economic base had dampened the effects of the drop in oil prices on the banking sector, echoing the view of the central banking authority, the Autoriti Monetari Brunei Darussalam (AMBD), earlier in the year.
“In our view, the low loan-to-deposit ratio and strong net external creditor position of the Brunei banking system mitigates [oil price-related] risks,” said S&P. Speaking about oil exporters more broadly, the agency noted the decline in global prices would result in lower government revenues and exports, reducing banking liquidity and potentially slowing sector growth and triggering an increase in non-performing loans. Nevertheless, it said that earnings buffers are sufficient to absorb losses in Brunei, alongside the six GCC member states, Kazakhstan, Malaysia and Nigeria, and it did not expect them to experience losses beyond its normalised estimates.
Strong capital levels
According to the AMBD, bank assets and deposits registered marginal declines of 3.7% and 4.3% respectively year-on-year in 2014, loans rose by 1% to $5.7bn and asset quality continues to improve. “The key financial soundness indicators in the banking sector were maintained at healthy levels [in 2014]. Strong capital and high liquidity levels, together with sustained earnings and improved credit risk management, resulted in maintaining financial system stability,” the AMBD said in a statement.
The positive outlook for banks is an achievement given that oil and gas account for more than half of the Sultanate’s economy and over 90% of exports. Oil revenues have helped foster a strong banking sector; many among the affluent population are able to bank with more than one institution and the government is a significant source of deposits. As S&P noted in March, “The banks are likely to maintain their substantial deposits from a wealthy government and its related entities, and the retail sector.”
The rise of Islamic banking in recent years has also helped the sector to flourish. Bank Islam Brunei Darussalam (BIBD) reported solid growth last year with a 7% increase in revenues and a 16% rise in profit, according to a recent statement from the Asian Banker. In February, S&P affirmed its BBB+ long-term rating for Baiduri Bank − the Sultanate’s biggest conventional bank − citing its stability. “We affirmed the ratings to reflect Baiduri’s stable businesses, sound management and strategy, and expected government support tempered by a loan book with high single-name concentration,” said Amit Pandey, S&P credit analyst.
Challenging times ahead
The endorsement is not to say banks will escape the oil price slump unscathed. Credit reform and the government's widening budget deficit are seen as the two main challenges. “A protracted weakness in oil price may enhance the challenges for the banking system. However, that is not our base case view on oil prices as of now,” added Pandey.
Minister of Finance II Pehin Dato Abd Rahman Ibrahim announced a total budget of $6.4bn for the 2015/16 fiscal year in March, with revenues projected at $4.12bn, about $1.5bn lower than last year. This will lead to a budget deficit of $2.28bn, representing about a tenth of GDP, which is among the highest in the ASEAN region.
“What we know for sure, these low oil prices will give significant impact and pressure to the economy of this country, as our private companies in the hydrocarbon sector recorded lower revenue, not to mention lower government revenue from the country’s main source of income,” said the minister.
However, reforms that have already been put in place and debt consolidation achieved through stricter financial measures are helping the banking sector.
Last October, the AMBD deregulated rates on housing loans, revoking regulations on profit rates on residential property financing for Islamic banks as well as interest rates on residential property loans for banks. In March 2013, the AMBD implemented a cap on interest rates or annualised profit rates for residential financing of 4.5%.
Speaking to OBG last year, the managing director of BIBD, Javed Ahmad, said the new regulations had been effective at limiting the amount of personal financing, establishing a fixed-rate pricing framework and setting a minimum deposit rate for investors.