Banks - RHB Invest 2016-01-18: Slump In Oil Prices Raise Earnings Risks

Banks - RHB Invest 2016-01-18: Slump In Oil Prices Raise Earnings Risks Singapore Banks DBS GROUP HOLDINGS LTD D05.SI  OCBC OVERSEA-CHINESE BANKING CORP O39.SI  UOB UNITED OVERSEAS BANK LTD U11.SI 

Banks - Slump In Oil Prices Raise Earnings Risks

  • SG Banks have tumbled 11% YTD on worries that the turmoil in the China and oil markets has increased earnings risks. 
  • Our scenario analysis suggests that the market may be pricing in an almost 10% default rate on oil & gas exposures. 
  • Near term, poor visibility on asset quality would continue to weigh on share price performance, notwithstanding –1SD valuation multiples. DBS is our preferred pick. 

 Turmoil in China and oil markets... 

  • It has been a turbulent start to 2016; the CNY has lost 1.4% YTD, the Shanghai Composite Index has fallen 16% over the same period while crude oil prices dipped below USD30/barrel (bbl) for the first time in 12 years. 

 …adding pain to the SG Banks. 

  • While concerns over China’s slowing growth are not new, growing predictions that oil prices would stay at depressed levels are stoking fear that Singapore’s three listed banks (SG Banks) would soon be hit with rising defaults in their oil and gas exposures. 
  • As at end-Sep 2015, exposure to the oil & gas sector amounted to SGD22.0bn for DBS, SGD12.8bn for Oversea-Chinese Banking Corp (OCBC) and SGD10.2bn for United Overseas Bank (UOB). 
  • SG Banks have declined 11% YTD (as at 14 Jan) in USD terms, the worst performer among ASEAN peers. 

 NPLs to rise but unlikely to reach alarming levels. 

  • Although acknowledging that recent developments have increased asset quality risks, SG Banks believe the rise in non-performing loans (NPLs) would remain manageable. 
  • Most oil & gas customers are said to have a decent balance sheet to help them weather the challenging times. 

 Scenario analysis. 

  • During the global financial crisis (GFC), DBS’ NPLs came mainly from the financial services sector with NPL ratio at 10.4%. 
  • For OCBC and UOB, the problem area was the manufacturing sector with NPL ratios reaching a high of 6.9% and 7.7% respectively. 
  • Assuming 10% of SG Bank’s oil & gas exposure turns bad, our sensitivity analysis suggests the following impact on 2016 financials: 
    1. sector NPL ratio to rise to 1.64% vs 2016F of 1.04%, 
    2. sector credit cost would hit 113bps vs 24bps (GFC: 99bps), 
    3. sector net profit would be cut by 44%, and 
    4. sector ROE to fall to 6.4% vs 11.2%. 

 Market pricing in a 10% default rate? 

  • Our scenario analysis points to GGM-based TPs that are 19-33% lower: SGD14.23 for DBS, SGD8.70 for OCBC and SGD16.85 for UOB. 
  • Against the current share prices, it appears that the 10% default rate for oil & gas exposures is close to being fully priced in. 
  • While we believe NPLs are unlikely to reach those levels, volatility in the currency and oil markets as well as poor visibility on asset quality trajectory would continue to weigh on share price performance in the near term. 
  • DBS is our preferred pick with high loan loss coverage (LLC) to better cushion rise in NPLs and its leverage to rising US rates. 

Singapore Research RHB Invest | http://www.rhbinvest.com.sg/ 2016-01-18

RHB Invest SGX Stock Analyst Report BUY Maintain BUY 21.10 Same 21.10
BUY Maintain BUY 11.70 Same 11.70
NEUTRAL Maintain NEUTRAL 21.70 Same 21.70