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DBS chief fails to ease analyst discomfort over energy exposure

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DBS Group Holdings Ltd chief executive officer Piyush Gupta's robust defense of his bank's handling of loans to Swiber Holdings Ltd has failed to ease some analysts' concerns that more losses could emerge from financing the struggling energy-services industry.

[HONG KONG] DBS Group Holdings Ltd chief executive officer Piyush Gupta's robust defense of his bank's handling of loans to Swiber Holdings Ltd has failed to ease some analysts' concerns that more losses could emerge from financing the struggling energy-services industry.

Following a briefing with Mr Gupta on Monday, Goldman Sachs Group Inc and Credit Suisse Group AG issued reports saying asset quality remains a concern for DBS, with the latter firm downgrading the Singaporean lender's stock to neutral from outperform.

The consensus analyst rating on South-east Asia's largest bank has dropped to the lowest in almost seven years, according to recommendations compiled by Bloomberg.

In its second-quarter results on Monday, DBS disclosed an exposure of S$721 million to Swiber and took S$150 million of provisions for losses related to the energy- services firm, which is under court supervision as it tries to turn its business around.

DBS had an exposure of S$7 billion to oil support-services companies other than Swiber, a presentation from the bank showed.

"We expect concerns over asset quality to weigh on price performance," Credit Suisse analysts Danny Goh and Dawei Lee wrote in an Aug 8 report. There are "signs of stress" in the bank's remaining oil and gas exposure, they said.

In breaking down its risk to energy services, DBS said S$2.3 billion was to five oil-services companies, one of which "has weakness".

A third of another S$2.7 billion portfolio of loans to 90 companies was also classified as weak, according to the presentation. It didn't identify the companies and Mr Gupta, 56, declined to give names at a press briefing Monday.

The expense DBS set aside to cover Swiber dragged its second-quarter profit down by 6 per cent.

DBS stock has fallen 5.3 per cent since July 28, when it first flagged it would take provisions for the troubled company. The bank's shareshave fallen 9.9 per cent this year to their latest close of S$15.04 ahead of the National Day holiday in Singapore Tuesday.

"Some worries on asset quality will linger," Goldman Sachs analysts wrote in an Aug 8 report. The New York-based bank has a buy rating on DBS with a 12-month target price of S$17.60.

Singaporean banks' loans to oil and gas-services providers have been in the spotlight since Swiber sought to liquidate its operations after facing payment demands from creditors, a plan it later dropped in favor of judicial management.

Many companies that specialise in servicing oil and gas producers are suffering as the plunge in crude prices since 2014 curtails exploration.

At the media briefing, Mr Gupta indicated the lender was caught off guard by how quickly Swiber collapsed and defended his bank's decision to extend the troubled company S$197 million of bridging loans in June and July to cover bond redemptions.

DBS's exposure to Swiber also includes S$403 million to finance working capital for two projects. Swiber is an "idiosyncratic" case because its financing is secured against working capital rather than physical assets, unlike other Singaporean companies in the same sector, said Mr Gupta, who has led DBS since November 2009.

The CEO said he had personally checked up on Swiber's financial health three months ago. He said the bank had spoken with a would-be investor to ensure an equity injection would be coming before deciding to extend the bridging loans.

"The problem is Swiber imploded in six weeks," Mr Gupta said. "Between the end of May through mid-July, people said you should have known - but none of the indicators were showing."

He provided enough detail at the briefings on Monday to convince Aberdeen Asset Management Plc investment manager Christina Woon that the bank "had a handle on the matter."

"It was helpful that Piyush went through the entire timeline and explained their thought processes leading up to the event in order to address concerns," said Ms Woon at Aberdeen, which holds DBS shares.

"The episode does raise questions about the bank's approach towards risk management, particularly on concentration risk within troubled sectors, but on balance, Piyush explained the situation well enough."

At Monday's briefing, Mr Gupta said DBS's nonperforming loans ratio is unlikely to exceed 1.4 per cent for all of 2016, compared with 1.1 per cent at end of June. He also pointed out that the bank's loans to oil service companies are largely secured with physical assets, including vessels.

Daiwa Capital Markets analyst David Lum said that downgrades to DBS's profit forecasts and ratings at some brokerages related to Swiber were probably overdone.

He reiterated his buy recommendation in an Aug 8 report, citing the bank's "superior" earnings prospects and cheaper valuations than its peers. He raised his target price on the shares to S$22 from S$20.50.

"A risk to our call would be another Swiber-like liquidation episode," Mr Lum said.

BLOOMBERG