Banks - CIMB Research 2016-07-29: NPL reality hits


Banks - NPL reality hits

  • In light of Swiber’s winding up, DBS will recognise S$150m in specific allowances.
  • We also highlight other small cap oil & gas names that could be at risk. We think more defaults in the sector are likely, but will be a 2017-18 story.
  • We maintain a Neutral sector weighting on Singapore banks. Valuations of 1x P/BV have largely priced in 10% ROE and asset quality concerns, for now.

DBS quantifies Swiber exposure at S$700m

  • Swiber filed for applications to wind up operations and to place the company under provisional liquidation. As of Mar 2016, Swiber had total debt of US$863m.
  • DBS is Swiber’s key banker. Its total exposure to the Swiber group is S$700m, which includes loans, bonds and off-balance sheet items. DBS expects to recover half the exposure which is secured by assets, and will provide for the remaining amount using surplus general allowances (S$200m) and new specific provisions of S$150m.

Implications for DBS earnings

  • DBS had cumulative general allowances of S$3,182m in 1Q16. Allowances in excess of expected losses can be included in Tier II capital up to a limit, and DBS has exceeded it by S$629m. The S$200m general allowances can be taken out from this surplus without impacting CAR. Additional SPs of S$150m make up 3% of our FY16F net profit and would likely lead to a revision in DBS’s S$750m SP guidance.
  • Assuming no other net new NPAs and provisions other than from Swiber, we estimate that DBS would see its NPL ratio inch up to 1.2% (1Q: 1.0%) but still be able to achieve allowance coverage ratio of 113% (OCBC: 100%, UOB: 126%).

Where oil & gas exposures stand across the banks

  • In 2Q16, OCBC had S$14.3bn exposure to the oil & gas sector and UOB, S$14.0bn. DBS’s exposure was S$22bn in 1Q. In particular, loans to the offshore support services sector were at S$6bn/4bn/7bn for OCBC/UOB/DBS (3%/2%/2% of loans).

Further NPLs and provisions likely for the oil & gas sector

  • Oil & gas support services firms remain highly geared, and those with notes due in 2016-18 could be at higher risk of default. We highlight several names below, including Kris Energy, Nam Cheong, Marco Polo and Ausgroup.
  • We think Ausgroup could be next, given that it has already breached the debt covenant on its S$87m notes due Oct 2016. DBS is its primary banker.
  • OCBC recognised new NPAs of c.S$370m for oil & gas in 2Q, while UOB saw the bulk of its S$802m new NPAs from the sector. We would not be surprised to see a similar trend at DBS with further weakness in the sector. Ausgroup had net debt of AUD157m as of Mar 2016, but the exposure is likely to be manageable for DBS as the loans are secured by cash and properties as collateral.

Maintain Neutral on Singapore banks

  • While we see pressures from NIM compression, slower topline growth and higher credit costs in the quarters ahead, we think these are largely priced in at 1x CY16 P/BV for 10% ROE. 
  • We think more defaults in the oil & gas sector are bound to happen if E&P activities remain suppressed, but it will likely be a 2017-18 story as most bonds are due then. 
  • We have already buffed up our provisioning assumptions above the banks’ guidance in preparation for a turn in the credit cycle.

Highlighted companies

DBS Group

  • ADD, TP S$17.96.
  • DBS proved its ability to generate above- peers ROE in 1Q, which we think is sustainable in the near term as wealth management, bancassurance and IB fees are likely to do well. DBS trades at the lowest valuation despite its highest ROE.


  • REDUCE, TP S$8.11.
  • We downgraded OCBC from Hold to Reduce on concerns over topline growth as loan pipeline appears weak, while NIMs are still likely to come under pressure in the quarters ahead. OCBC also looks the most expensive on a P/B basis though ROE is the lowest.

United Overseas Bank

  • HOLD, TP S$18.52.
  • We like UOB for its ability to generate stronger loan growth than peers, while growth in wealth management and credit card fees continues to be promising. However, positives appear to be priced in at 1x P/B.

Jessalynn CHEN CIMB Securities | http://research.itradecimb.com/ 2016-07-29
CIMB Securities SGX Stock Analyst Report REDUCE Downgrade HOLD 8.11 Down 8.80
ADD Maintain ADD 17.96 Same 17.96
HOLD Maintain HOLD 18.52 Down 18.74