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DBS Bank's total oil & gas exposure has increased to S$23 billion, up S$1 billion due to more trade finance loans, as the bank continues to do business in a sector straining under the weight of low oil prices.
Piyush Gupta, DBS chief executive, also warned that S$900 million of its oil & gas exposure is weak as some are linked to Swiber Holdings - which collapsed about two weeks ago - and he expects "contagion" to emerge later this year. Singapore's largest bank posted S$1.05 billion net profit for the second quarter, down 6 per cent from a year ago due to the S$150 million loss or net allowance charge it took for the Swiber group which is now under judicial management.
Of the total oil & gas exposure as at end-June, loans went up S$2 billion to S$19 billion as "trade finance has spiked up in this quarter", said Mr Gupta on Monday during the bank's Q2 results briefing. Earlier in February, DBS said that its oil & gas exposure totalled S$22 billion, of which S$17 billion were loans.
In an update on DBS's exposure to the struggling sector, he said that the riskiest part, some S$7 billion, is to the support services cluster, down from S$9 billion for Q1. He said that S$2 billion of this is to state-owned or government-linked firms and shipyards. While some are under stress, these shipyards are part of large conglomerates that have other sources of support.
The sector is made up of producers, traders, processors and the riskiest, support services. DBS said that it has no material weakness in its producers, traders and processors portfolio. Swiber was a support service firm and 13 banks and financial institutions had extended to the group banking facilities totalling in excess of US$736 million; with DBS accounting for the lion's share of S$721 million.
Drilling further into the support services exposure, Mr Gupta said that the remaining S$5 billion which is 90 per cent secured, comprises S$2.3 billion to five names of which one has weakness. The remaining S$2.7 billion has 90 names and one third of that has weakness or S$900 million.
"Some are Swiber linked" and he expects "some contagion" coming in H2. Even with more bad loans expected, he said that DBS's total non-performing loan ratio for full year 2016 should not exceed 1.3 to 1.4 per cent. For Q2, NPL rose to 1.1 per cent from 0.9 per cent a year ago and one per cent for Q1.
He noted that the bulk of the bank's security were charter vessels that are valued every six months, and these have been coming down.
The sector remains under stress and even with oil prices recovering to US$40-45, there were more contract cancellations than in Q1, he said. Oil prices fell to 13-year lows of below US$30 per barrel in January.
At the end of last year, the loan to value against these vessels were running at 50-60 per cent, he said. At the latest valuations at the end of June, LTVs are between 70-80 per cent.
"If I can get the LTVs today, I can recover all of my loans. Assume the vessels don't even get those valuations, and there is another 10-20 per cent haircut, we will still recover all of our loans."
On how DBS was caught off guard by Swiber's collapse, he said that it was a firm that the bank had been doing business with for some 10 years; at end-June, it had "zero overdue with us".
Describing Swiber as "idiosyncratic" and "not representative of Singapore's oil & gas industry", he said that it was one of a handful of names in Singapore which do a contracting business.
Think of Swiber as a main contractor which gets a contract, then goes to the bank for a performance bond, asks for working capital to buy materials, hire workers to get the job done which generally takes 2-3 years, he said.
The risk for DBS is execution risk and counterparty risk, he said, referring to the ability of Swiber to complete the job and that its customer pays up.
He said that Swiber imploded in six weeks.
DBS had been in close contact with Swiber, it also talked to the private equity firm AMTC that had promised to inject US$200 million into Swiber, but did not do so, leading to the collapse.
Mr Gupta said that AMTC had sent in teams of consultants and lawyers to look at the Swiber deal; he himself had talked to AMTC chief executive Smith O'Connor who told The Business Times last Friday that the deal was still "alive".
DBS was facing a "classic banker's dilemma" as Swiber neared crunch time, he said.
AMTC's injection was being delayed by two weeks, and DBS did have a choice to let the customer default but decided not to, he said.
"I'm not ashamed to say, this is the kind of bank we are. We don't pull the plug on customers."
Part of DBS's S$721 million exposure included S$403 million of working capital for two projects, of which one was 80 per cent completed, the other 50 per cent, he said. DBS also knows Swiber's customer well.
Referring to the S$200 million bridging loan extended in June and July that Swiber used for bond redemptions, Mr Gupta said that the bank was faced with the question of whether it should put in more money to get more back.
He said that DBS private bank clients hold less than 20 per cent of Swiber's outstanding S$540 million bonds, when asked about its private bank exposure.
The total leverage the bank has given to private bank clients against the Swiber bonds is "minuscule" - S$35 million; there were 20 margin calls, all of them have been paid, he said.