DBS GROUP HOLDINGS LTD (SGX:D05)
OVERSEA-CHINESE BANKING CORP (SGX:O39)
UNITED OVERSEAS BANK LTD (SGX:U11)
Singapore Banks - Exposure To O&G Sector – Tried, Tested & Whittled Down
- Banks have whittled down their exposures to the O&G sector through recoveries and write-offs. The remaining exposures have weathered volatilities in crude oil prices over the past five years. Additional provisions are limited by significant mark down in valuation of collaterals.
- Banks’ dividend yields have surged to about 6% after the recent steep correction. OCBC is trading below BVPS with 2020F P/B at an attractive 0.90x. See DBS Dividend History, OCBC Dividend History, UOB Dividend History.
- Maintain OVERWEIGHT. Re-iterate BUY for DBS and OCBC.
WHAT’S NEW
Collapse in prices of crude oil.
- Crude oil prices went into a tailspin after Saudi Arabia flooded the market and slashed official selling prices by US$6-8 per bbl for the month of April, following the breakdown in talks between OPEC and Russia. The alliance between OPEC and Russia has restrained supply and supported prices of crude oil since early-17.
- The International Energy Agency (IEA) had earlier cut its oil demand forecast by 1.1m bbl per day for 2020 (possibly marking the first year of annual drop in demand since the Global Financial Crisis) due to the Covid-19 outbreak causing a deep contraction in China’s oil consumption and major disruptions to global travel and trade.
Unprecedented flight to safety.
- Prices of crude oil collapsed by 10% last Friday and 25% this Monday to a four-year low. The plunge triggered an unprecedented flight to safety to government bonds. In the US, 10-year government bond yield has collapsed by 1.38ppt ytd to 0.54%, a historic low.
- In Singapore, yield for 10-year government bond has similarly dropped by 0.73ppt ytd to 1.01%.
ACTION
Banks have weathered volatilities in prices of crude oil.
- The drop in prices of crude oil by 46% in 2014 and 30% in 2015 caused banks to suffer NPL formations and incur higher provisions for exposures to the Oil & Gas (O&G) sector in 2016 and 2017. However, these O&G borrowers have weathered low crude oil prices for the past five years.
- Banks would also have beefed up provisions for exposures to the O&G sector under FRS 109, which was implemented since 1 Jan 18.
DBS (SGX:D05) (BUY, Target Price: S$26.20)
- Exposures to the O&G sector accounted for 5.6% of DBS’s total loans as of Dec 16. DBS did not disclose its current exposure to the O&G sector but the amount is likely to have declined significantly due to recoveries and write-offs.
- Likely to have reduced exposure to shipyards. DBS has exposure of S$1.6b to state-owned/government linked shipyards as of Jun 17. The exposure is likely to have whittled down after Sembcorp Marine (SGX:S51) retired S$1.5b of bank borrowings using proceeds from issuance of a 5-year subordinated loan facility of S$2b to parent Sembcorp Industries (SGX:U96) in Jun 19.
- See DBS Share Price; DBS Target Price; DBS Analyst Reports; DBS Dividend History; DBS Announcements; DBS Latest News.
OCBC Bank (SGX:O39) (BUY, Target Price: S$12.25)
- Exposures to the O&G sector accounted for 5% of OCBC’s total loans as of Dec 19.
- Comprehensively addressed exposure to O&G. OCBC marked down the valuation of collaterals for O&G exposures in 1Q19:
- Vessels gainfully employed (70% of oil & gas NPLs) - Marked down to 55-60% of refreshed valuations (40-45% discount).
- Vessels pending employment (30% of oil & gas NPLs) - Marked down to 3% of refreshed valuations, based on scrap value at 6% of refreshed valuation minus cost to transport vessels to scrap yard.
- See OCBC Share Price; OCBC Target Price; OCBC Analyst Reports; OCBC Dividend History; OCBC Announcements; OCBC Latest News.
UOB (SGX:U11) (NOT RATED)
- Exposures to the O&G sector accounted for 4.9% of UOB’s total loans as of Dec 16. UOB has significantly reduced its exposure to the O&G sector to 2-3% of total loans in 3Q19 when it de-risked its balance sheet (one third: upstream (exploration and shipyards), two thirds downstream (production, refineries and traders)).
- UOB has also written down valuation of collaterals by 90% (residual balance of 10%) in 4Q17.
- See UOB Share Price; UOB Target Price; UOB Analyst Reports; UOB Dividend History; UOB Announcements; UOB Latest News.
OCBC and UOB already trading below BVPS.
Attractive dividend yield screams BUY.
- Over the past 30 years, DBS and OCBC have gone above the dividend yield of 6% once (GFC) and UOB twice (AFC and GFC). A steep correction that causes dividend yield to overshoot to 6% tends to be followed by a sharp rebound. DBS and OCBC currently trade at attractive 2020F dividend yields of 6.2% and 5.9% respectively.
- See report: Singapore Banks - UOB Kay Hian Research 2020-03-10: The Magic Number Is 6%.
- We expect dividend payout for Singapore banks to be sustainable due to strong CET-1 CAR, which are above 14%. The banks also have the option to turn on their scrip dividend scheme should regional economies slip into a recession.
Maintain OVERWEIGHT.
SECTOR CATALYSTS
- Banks evolving into yield plays.
ASSUMPTION CHANGES
RISKS
- Outbreak of Covid-19 affecting growth and credit costs in 2020.
- Economic slowdown in China.
Jonathan KOH CFA
UOB Kay Hian Research
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https://research.uobkayhian.com/
2020-03-11
SGX Stock
Analyst Report
26.200
SAME
26.200
12.250
SAME
12.250
99998.000
SAME
99998.000
