Singapore Banks - Maybank Kim Eng 2017-06-28: Tail Risks From O&G

Singapore Banks - Maybank Kim Eng 2017-06-28: Tail Risks From O&G Singapore Banks Banking Sector Outlook DBS GROUP HOLDINGS LTD D05.SI OVERSEA-CHINESE BANKING CORP O39.SI UNITED OVERSEAS BANK LTD U11.SI

Singapore Banks - Tail Risks From O&G


Assessing oil-related exposures following recent oil price weakness 

  • The crude oil price has fallen to USD46 per barrel on concerns of a supply glut, levels not seen since OPEC’s output cut in Nov 2016. The worst of O&G NPL worries for Singapore banks have abated, but the risks linger.
  • Singapore banks have not really cut back on their exposures to these sectors. Since DBS/OCBC’s O&G support services NPL ratio is 22-23%, the pace of delinquency should ease, but credit costs may scale higher.
  • Against sanguine economic prospects, asset quality is unlikely to be the focus unless the oil price slips below the USD40 level. 
  • Maintain NEUTRAL.


Default risks remain 

  • The bond yield for the Bloomberg USD high-yield corporate energy index has risen to 7.7%, a level not seen since end-Nov last year. 
  • Similarly, yields of short dated notes (2017 and 2018) from smaller Singapore-listed O&G players (i.e. Nam Cheong and Pacific Radiance) have climbed. 
  • With Swiber and Swissco under judicial management, and Ezra having filed for bankruptcy, we think more default risks remain.


Pace of acceleration of new NPLs to ease 

  • Risk appetite for Singapore banks have diverged, with OCBC’s exposure to O&G and O&G support services up the most. Between 4Q16-1Q17, lending to the O&G sector rose 6-20% QoQ from higher exposures to upstream (i.e. national oil companies) and the less risky downstream/traders segment. 
  • We estimate the NPL ratio for support services rose from 9-18% in 3Q16 to 15-23% in 1Q17 as banks took proactive steps to classify some risky names into NPLs. More names could slide into NPLs this year, but the pace of new NPL formation will ease as the weakest and most chunky exposures have been recognised as delinquent. 
  • But further deterioration of industry dynamics could require higher specific provisions. We estimate FY17 credit costs to be 33-36bps for the banks. 
  • UOB has the lowest O&G exposure, but higher NPA coverage of 116% (vs peers’ 101-103%) makes it relatively shielded from any further asset-quality deterioration in the O&G sector, in our view.


Maintain NEUTRAL 

  • We maintain our NEUTRAL view on Singapore banks. DBS remains our preferred pick due to its ability to manage liability costs to drive PPoP.
  • Key risks to our call are: 
    1. NIM improvement from higher rates; 
    2. higher non-interest income; and 
    3. benign credit costs.







Ng Li Hiang Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2017-06-28
Maybank Kim Eng SGX Stock Analyst Report HOLD Maintain HOLD 19.180 Same 19.180
HOLD Maintain HOLD 9.850 Same 9.850
HOLD Maintain HOLD 20.800 Same 20.800



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