Singapore Banks - UOB Kay Hian 2016-08-01: Fear Of Contagion Triggered By Swiber

Singapore Banking - UOB Kay Hian 2016-08-01: Fear Of Contagion Triggered By Swiber OCBC OVERSEA-CHINESE BANKING CORP O39.SI  DBS GROUP HOLDINGS LTD D05.SI  UNITED OVERSEAS BANK LTD U11.SI 

Banking – Singapore: Fear Of Contagion Triggered By Swiber

  • Asset quality concerns over exposure to the O&G sector reared its ugly head when Swiber applied for judicial management. 
  • DBS has exposure of S$700m to Swiber and would recognise required specific provisions of S$150m upfront in 2Q16, which will reduce 2016F earnings by 3.1% and lower ROE by 0.3ppt to 9.7%. 
  • OCBC does not have exposure to Swiber and was conservative to recognise NPLs for the O&G sector early. 
  • Our preferred BUY is OCBC with target price at S$10.48.



WHAT’S NEW


Placed under judicial management. 

  • The directors of Swiber Holdings made an application to wind up the company and to place the company in provisional liquidation on 27 Aug 16, with winding-up application originally fixed for hearing on 19 Aug 16. On 29 Jul 16, the directors made an application to place the company under judicial management instead. As such, the company has applied to discharge the provisional liquidation order and to withdraw the winding-up application. The sudden turn of events came as a shock as Swiber had fully repaid S$130m of medium-term notes (MTN) on 6 June and S$75m of MTNs on 8 July.

Swiber is over-leveraged. 

  • Swiber is an integrated offshore construction and support service provider for shallow water oil & gas development. It owns and operates 13 construction vessels and cranes & machineries with carrying value at US$600m and US$45m respectively as of Dec 15. It has a leasehold property valued at US$21.3m. It has a 27% stake in listed Vallianz Holdings with market value of S$21.3m.

Swiber has paid-up share capital of US$241.3m and retained earnings of US$257.4m. 

  • Unfortunately, it is over-leveraged with bank borrowings of US$322.9m, notes payables of US$555.7m and finance lease of US$141.7m as of Mar 16. Its net debt/equity was 1.57x and net debt/total assets was 0.45x.



ACTION


Strain from exposure to vulnerable offshore support services. 

  • Banks face risk from deterioration in asset quality from the O&G sector. In addition, sentiment remains fragile due to slower global growth and geopolitical uncertainties relating to Brexit (23 June) and US Presidential Election (8 November).

Our OVERWEIGHT call is premised on banks’ cheap valuations. 

  • DBS and OCBC trade at 2016F P/B of 0.91x and 1.01x, which is 1x SD and 2x SD respectively below long-term mean. They also provide attractive dividend yield of 4%. 



DBS Group Holdings (BUY/S$15.39/Target: S$18.90).

  • DBS disclosed that it has total exposure of S$700m to Swiber Holdings, comprising loans, bonds and off-balance sheet items. We understand that the exposure is largely loans, which are partially secured. The value of collaterals is conservatively marked and management expects to recover S$350m from sale of vessels.
  • Management intends to take the required specific provision upfront and bite the bullet in 2Q16. Estimated specific provision of S$150m would be charged to Profit & Loss in 2Q16 after writing back surplus general provision of S$200m. DBS has sufficient surplus general provision of S$629m on its balance sheet as of Mar 16.
  • We estimate that net profit would be reduced by 12.8% to $882m for 2Q16. For 2016, we have cut our net profit forecast by 3.1% to $4,052m and ROE is lowered from 10% to 9.7%. However, its loan-loss coverage would drop from 131.3% to 103.3% in 2Q16.
  • We have assumed that NPL ratio for the vulnerable offshore support services segment would peak at 28% in 2Q17 (1Q16: 1%, previous assumption: 20%). We foresee NPL ratio surge to 1.4% in 2Q16 (1Q16: 1.0%) and peak at 1.9% in 2Q17.
  • Our target price is reduced to S$18.90 based on 1.12x P/B, which is derived from the Gordon Growth Model (ROE: 9.3%, COE: 8.3% (Beta: 1.1x) and Growth: 0.0%).


Oversea-Chinese Banking Corp (BUY/S$8.62/Target: S$10.48).

  • OCBC was not listed as a banker on Swiber's annual report and is unlikely to have any exposure to Swiber.
  • We maintain our assumption that NPL ratio for the vulnerable offshore support services segment would peak at 20% in 2Q17 (2Q16: 15%). We foresee overall NPL ratio peaking at 1.6% in 2Q17 (2Q16: 1.1%).
  • There are early signs that OCBC’s conservative approach to recognise NPLs early is working. An O&G loan of S$279m in Malaysia restructured and recognised as NPL a year ago was upgraded in 2Q16. The loan has performed based on the restructured terms for 12 months. Visibility for future cash flows has also improved due to extension of the charter. The upgrade indicates that OCBC was conservative and prudent to restructure the loan early. 50% of its NPLs in the O&G sector are not overdue.
  • Our target price of S$10.48 is based on 1.26x P/B, which is derived from the Gordon Growth Model (ROE: 9.8%, COE: 7.8% (Beta: 1.0x) and Growth: 0.0%).


United Overseas Bank (NOT RATED/S$18.26).

  • UOB disclosed that it has exposure to Swiber, which is an account identified as vulnerable during a previous stress test. Management did not disclose the amount but said it is manageable and fully secured. We understand that the exposure to Swiber is less than S$100m and has not been recognised as NPL in its 2Q16 results.
  • UOB has the least exposure to the O&G sector. Loans extended to the O&G sector amounted to S$9.3b or 3.9% of total loans, compared with DBS’ S$17b (5.9% of total loans) and OCBC’s S$12.6b (6.1% of total loans).
  • UOB is more resilient and well positioned to weather the current credit cycle. 



SECTOR CATALYSTS

  • Economic growth has slowed in both Southeast Asia and China.
  • Banks’ share prices have experienced massive correction. DBS is trading at 0.91x 2016F P/B (GFC: 0.67x) and OCBC at 1.01x 2016F P/B (GFC: 0.83x). Thus, downside is limited as valuations are near the trough levels of the global financial crisis (GFC).


ASSUMPTION CHANGES

  • Key changes to our earnings are as stated above.


RISKS

  • Further economic slowdown and political risks in regional countries.




PEER COMPARISON





Jonathan Koh CFA UOB Kay Hian | http://research.uobkayhian.com/ 2016-08-01
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 10.48 Down 10.68
BUY Maintain BUY 18.90 Down 19.25
NOT RATED Maintain NOT RATED 99998 Same 99998


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