Banks - RHB Invest 2016-09-02: Oil & Gas Exposures Are Largely Priced In

Banks - RHB Invest 2016-09-02: Oil & Gas Exposures Are Largely Priced In Singapore Banks DBS GROUP HOLDINGS LTD D05.SI  OCBC OVERSEA-CHINESE BANKING CORP O39.SI  UOB UNITED OVERSEAS BANK LTD U11.SI 

Banks - Oil & Gas Exposures Are Largely Priced In

  • The market and RHB have already factored in conservative assumptions on loan loss provisioning. Hence, negative news flow from the O&G space, following recent developments for AusGroup, are not going to shock bank investors. 
  • We believe the market has overlooked the positives from possible increases in SIBOR in late 2016 – SIBOR could rise on the back of Fed Funds rate increase later this year. 
  • DBS is most leveraged to SIBOR increase – with its NIM seen to widen most. It remains our only BUY recommendation amongst Singapore banks.

Some investors have raised concerns relating to DBS exposure to AusGroup. 

  • Relevant extracts from AusGroup’s FY16 results announcement this week are:
    1. In 2QFY16, AusGroup entered into an accounts receivable purchase facility with DBS (ARP facility)… As at 30 Jun 2016, AUD2.45m of this balance was utilised.
    2. In 3QFY16, AusGroup entered into a AUD30m Short Term loan facility with DBS Bank. As at 30 June 2016, AUD11.0m of this balance was drawn down.
  • The information suggests that DBS’ exposure to AusGroup is not that significant.

We have already factored in higher provisioning. 

  • Whilst we continue to believe that the three Singapore banks’ exposure to the oil & gas (O&G) space could see further asset quality deterioration over the next few quarters, we have assumed higher loan loss provisioning than consensus. 
  • Previously, our FY16 loss provisioning was sharply higher than consensus but consensus has risen, and our current FY16 provisions expectation is 4% higher than consensus.

Worst-case scenario analysis suggests SG Banks can manage. 

  • In our worst case analysis, we assumed an aggressive 20% NPL ratio for SG Banks' O&G exposure, and provisioning of 40% of the NPLs. Taking the case of Swiber where DBS (DBS SP, BUY, TP: SGD17.30) has a SGD721m exposure, DBS took a net allowance charge of SGD150m (21% of exposure) in 2Q16 after drawing down SGD250m (35% of exposure) from general allowance reserves. Hence, we believe our 40% provisioning is quite reasonable.
  • Using this worst-case scenario, DBS’ O&G provisioning could account for 27% of our DBS FY17 PBT forecast, and 22% for the other two banks. Bear in mind our current earnings forecasts have already factored in a certain amount of provisions.

DBS remains best pick. 

  • We like to highlight that this is a worst-case scenario, and that the actual situation is likely to be less severe. Although we will see more of O&G NPLs going forward, the market has already factored this in. The risk lies in the amount of provisions going forward, which could be significantly higher or lower than the consensus view.

We are NEUTRAL on the SG banking sector. 

  • We believe the weakness of DBS’ share price post Swiber developments has made DBS more attractive. 
  • DBS is our preferred stock pick and only BUY recommendation within the SG Banks space. Of the three, it will benefit most from a rise in SIBOR – a likely consequence of a Fed Funds rate hike.

Leng Seng Choon CFA RHB Invest | http://www.rhbinvest.com.sg/ 2016-09-02
RHB Invest SGX Stock Analyst Report BUY Maintain BUY 17.30 Same 17.300
NEUTRAL Maintain NEUTRAL 8.68 Same 8.68
NEUTRAL Maintain NEUTRAL 18.85 Same 18.85