Banks - CGS-CIMB Research 2019-01-10: O&G Trouble Could Be One-Off

DBS GROUP HOLDINGS LTD (SGX:D05) UNITED OVERSEAS BANK LTD (SGX:U11) OVERSEA-CHINESE BANKING CORP (SGX:O39)

Banks - O&G Trouble Could Be One-Off

We think that further widespread deterioration of the O&G sector following Coastal Oil’s liquidation is unlikely.
In the worst case scenario of incurring full provisions, credit costs could rise by 1-6bp. We believe the NPL implication is not material at 1-6bp.
Stay sector Overweight. OCBC is our top pick for continued NIM upside and attractive valuation of 1.1x CY19 P/BV - below long-term mean of 1.4x.

Coastal Oil Singapore, a crude oil product supplier, filed for liquidation on 13 Dec 2018. The company has outstanding debts of US$354m – about half of which is owed to DBS (US$29.9m), OCBC (US$122.7m) and UOB (US$19.5m).

Recall that in 2H17, the Singapore banks cleaned up their books with the accelerated recognition of vulnerable oil and gas (O&G) exposures. At that time, DBS GROUP HOLDINGS LTD (SGX:D05) (S$5.3bn O&G exposure or c.2% of total loans), was hit the hardest with 109bp of credit costs in 3Q17, while OVERSEA-CHINESE BANKING CORP (SGX:O39) (S$12.6bn or 5% of loans) and UNITED OVERSEAS BANK LTD (SGX:U11) (S$10.7bn or 5% of loans) were less impacted, booking 30bp and 24bp of allowances in 4Q17.
On 3 Jan 2019, DBS had seized two of Coastal Oil’s vessels (Atalanta and Coastal Neptune) on grounds of US$5.4m and US$3.6m of mortgage claims; estimated values of the vessels were US$15.6m and US$7.8m, respectively. We believe that provisions would have been progressively set aside for Coastal Oil given the likely weakening of cash flows leading up to liquidation. Without taking into account provisions or other collateral, conservatively, DBS’s credit cost would be pushed upwards by 1bp (to 24bp in FY19), OCBC by 6bp (to 19bp) and UOB by 1bp (to 19bp). These ‘higher’ levels remain below the average of 27-48bp in FY16 when oil prices were at an all-time low.
Potential rise in non-performing asset (NPA) ratios is minimal: DBS’s ratio would rise to 1.57% (from 1.56%), OCBC’s to 1.44% (from 1.38%) and UOB’s to 1.65% (from 1.64%). There ratios have stayed broadly stable over the past year since gradually creeping up from 1.0% for DBS and OCBC and 1.4% for UOB in 1Q16.

All six of Coastal Oil’s vessels are in service, and another is due for completion in 2019. Using Clarkson Research as a broad estimation of Coastal Oil’s vessels, the total market value of c.US$40m-45m would be significantly short of covering Coastal Oil’s outstanding debts.
The read-through from credit costs would dent earnings by 0.3% for DBS, 0.6% for UOB, and 3.2% for OCBC.

While macroeconomic growth is set to be slower in FY19, we stay sector Overweight on account of comfortable capitalisation and further upside of NIMs. The sector is attractive at 1.1x P/BV. We do not think that Coastal Oil’s liquidation is indicative of more material deterioration in the sector. Downside risk: continued dip in oil prices.
OCBC remains our top pick for the sector due to continued NIM upside alongside attractive valuations. OCBC trades at 1.1x CY19 P/BV–below long-term mean of 1.4x.

DBS GROUP HOLDINGS LTD (SGX:D05) has the smallest net exposure to Coastal Oil given its mortgage claim on two of the latter’s vessels. We understand that DBS has significantly written-down the collateral values of most of its O&G book and further weakness from this book may not be significant.

OVERSEA-CHINESE BANKING CORP (SGX:O39)’s proportion of O&G exposure to its loan book is the largest among its peers. We think that our 6bp credit cost estimate for its exposure to Coastal Oil is likely to materialise given the minimal asset value of its vessels.

O&G loans account for c.5% of UNITED OVERSEAS BANK LTD (SGX:U11)’s loan book; most of the exposures are to the downstream segment. UOB is minimally impacted by Coastal Oil’s liquidation; we take comfort from its 14.1% CET-1 ratio – the highest among its peers.

Andrea CHOONG CGS-CIMB Research | LIM Siew Khee CGS-CIMB Research | https://research.itradecimb.com/ 2019-01-10

SGX Stock Analyst Report HOLD MAINTAIN HOLD 27.000 SAME 27.000

ADD MAINTAIN ADD 31.000 SAME 31.000

ADD MAINTAIN ADD 14.000 SAME 14.000