Singapore Banks - Maybank Kim Eng 2017-03-21: O&G Woes Not Over

Singapore Banks - Maybank Kim Eng 2017-03-21: O&G Woes Not Over Singapore Banks Ezra Bankruptcy DBS GROUP HOLDINGS LTD D05.SI OVERSEA-CHINESE BANKING CORP O39.SI UNITED OVERSEAS BANK LTD U11.SI

Singapore Banks - O&G Woes Not Over

Ezra filed for US bankruptcy 

  • Ezra Holdings (EZRA SP, Not Rated) and two other entities, Ezra Marine Services (EMS) and EMAS IT Solutions (EMIT) filed for Chapter 11 protection with the US Bankruptcy Court on 18 Mar. 
  • According to media reports, court filings showed that DBS has the largest exposure with total secured and unsecured claims at USD328m, followed by OCBC at USD280m and UOB at USD33m. 
  • Ezra’s associate, EMAS Chiyoda Subsea (ECS), also filed for Chapter 11 protection on 27 Feb, with unsecured claims of c.USD100m in total for DBS and OCBC, based on court filings. Its subsidiaries, EMAS Offshore (EMAS SP, Not Rated) and Triyards (ETL SP, Not Rated) were suspended and halted from trading respectively.

Banks’ FY17E profits may fall by 3-8% 

  • Banks do not disclose their exposure or provisions to Ezra. Therefore, in our effort to quantify the actual impact of Ezra Group, we had to make broad assumptions that will lead to some discrepancy between our estimates and the actual figures. 
  • We estimate Singapore banks have c.SGD217-748m of claims and borrowings to Ezra Group, based on court filings and bank borrowings (Fig 1). If we assume O&G support services’ NPLs require specific provisions of 50 cents per dollar of problem loans, and the estimated claims/borrowings for Ezra Group are classified as NPLs, FY17E profits may fall by 3-8%, based on our estimates. Having said that, we believe banks have already classified loans to Ezra as NPLs and made some provisions for it.
  • We think it is reasonable to believe that provisions will remain elevated and risks of further defaults remain. However, the rate of new NPL formation from the O&G sector is likely to ease this year as we believe the chunky exposures have been recognised as NPLs. 
  • We currently estimate specific provisions over average net loans to be c.29-37bps across the banks for FY17E.

Prefer DBS 

  • We prefer DBS relative to the other companies within our Singapore banks coverage as we are positive on its ability to drive pre-provision profits in the face of asset-quality deterioration, particularly for its O&G exposure. 
  • Risks to our call include: 
    1. NIM improvement from higher rates; 
    2. higher non-interest income; and 
    3. lower provisions.

Ng Li Hiang Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2017-03-21
Maybank Kim Eng SGX Stock Analyst Report HOLD Maintain HOLD 18.130 Same 18.130
SELL Maintain SELL 8.050 Same 8.050
HOLD Maintain HOLD 19.540 Same 19.540