Banks - Assessing the impact of Ezra group
- We estimate DBS’s exposure to the Ezra group is S$637m, OCBC: S$300m, UOB: S$166m, assuming each company’s debt is equally split among its key bankers.
- Based on 40-80% write-down in the book value of fixed assets, we estimate that DBS will have to make SPs of 8-16bp, OCBC: 9-12bp and UOB: 6-7bp.
- At above 1x CY17 P/BV, we think the market has yet to price in asset quality concerns which could erode the impact of higher NIMs in 2017.
Ezra or its associated companies could face liquidation
- Ezra has called for a trading halt on 1 Feb pending the release of an announcement.
- We believe this is related to the results of its discussions with lenders and other stakeholders regarding its financial position, which could result in the group, its JV or subsidiaries’ liquidation in the worst case scenario.
- As of 31 Aug 2016, the group had US$989m of term loans and bills payable to banks, including US$568m from 75.46%-owned EMAS Offshore Limited and US$150m from 60.9%-owned Triyards Holdings Limited.
Impairment at EMAS Chiyoda Subsea
- Ezra’s JV partners in its subsea business, EMAS Chiyoda Subsea Limited, recently wrote down their stakes in the JV. Chiyoda Corp took a ¥38bn impairment charge for its 35% stake, while NYK Line took a ¥13bn impairment on its 25% stake.
- After netting off their share of goodwill, we estimate that the two JV partners wrote down 25-74% of fixed asset value. With estimated bank debt of US$579m, its fixed assets can be written down by 43% before recoverability comes into question.
Quantifying lending exposures to the Ezra group
- As the banks do not disclose their lending exposures to individual clients, we adopt an arbitrary approach and assume each company’s debt is equally split among its principal bankers as listed in its annual report.
- Based on this assumption, we estimate that DBS has the largest exposure to the Ezra group of companies at S$637m, followed by OCBC at S$300m and UOB at S$166m.
- DBS’s larger exposure is mainly due to its lending to EMAS Chiyoda Subsea, given that it was the co-lead arranger for the loan facility for EMAS Chiyoda’s main vessel, the Lewek Constellation.
DBS would be hardest hit in event of liquidation
- Should the entire Ezra group go into liquidation, the banks will have to recognise their exposures as NPLs and make adequate provisions for the unrecoverable amounts.
- Based on 40-80% write-down in book value of fixed assets across the group, we estimate DBS will have to make specific provisions (SPs) of 8-16bp, OCBC: 9-12bp and UOB: 6-7bp. This assumes no SPs have been taken yet, and will impact DBS’s FY17F net profit by 6-12%, OCBC: 5-8%, and UOB: 4-5%.
Maintain sector Underweight
- We remain Underweight on the Singapore banks, as asset quality concerns still loom.
- Despite higher oil prices and the introduction of new working capital loans by SPRING Singapore, the banks’ exposure to oil & gas firms still remain under stress as E&P spending has yet to return.
- We are also watchful of the banks’ exposure to the SME sector and trading firms that could be hurt by the stronger US dollar.
- We are less optimistic than consensus on the banks’ NIM outlook in 2017, as weak loan demand could put pressure on customer loan yields. Recent US$ weakness also supports our more bearish expectation of SIBOR/SOR. OCBC remains our top sell.
- Risks to our call include higher interest rates and stronger GDP growth.