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Oil & gas sector still stinging Singapore banks

DBS warns of bigger specific allowances; OCBC says industry not in midst of recovery yet

Singapore

DBS Bank closed off the second-quarter results session for Singapore banks with a more muted assessment of its oil and gas (O&G) portfolio, joining its peer OCBC Bank in signalling that the sector is still stinging from low oil prices.

"While contracts are picking up, the oil-and-gas service players don't have any pricing power," DBS chief executive officer Piyush Gupta told reporters at the bank's results briefing on Friday. The rates today are barely able to cover operating expenses for such players, he added.

Even as there are efforts by support service players to repurpose vessels, such work not only requires some capital expenditure, but also creates repurposed vessels that again do not command higher rates.

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Mr Gupta warned of bigger specific allowances than expected, given the continued stress in the O&G segment.

In the first quarter of 2017, DBS had guided for specific provisions at S$1.1 billion (excluding Swiber Holdings) for the full year, and Mr Gupta now said this could edge out of that estimate.

Similarly, OCBC's chief executive officer Samuel Tsien said the industry was not in the midst of recovery yet.

"We need the oil-and-gas sector to actually improve before the whole situation can be classified as recovering and I don't think we are at this stage yet," said Mr Tsien, referring to oil prices which he said need to be seen at a sustainable higher level than at current levels.

Oil is still trading below US$50 per barrel. Singapore banks have said oil prices have to head to as much as US$70 per barrel before offshore support vessel operators can make a decent margin.

Bank stocks closed lower on Friday. Shares of DBS were down 59 Singapore cents to S$21.49, shares of OCBC fell 11 Singapore cents to S$11.21, and those of UOB fell 28 Singapore cents to S$24.03.

For S&P analyst Ivan Tan, the "lingering problems" in the O&G sector that would lead to higher provisioning still pose a threat to profit growth in the months ahead.

"Profitability is reasonably good but profit growth might face some challenges. Interest margins remain compressed and the Fed rate hikes have not translated into higher Sibors (Singapore Interbank Offered Rates)," said Mr Tan. "The Singapore banks performed well in Q2 considering the subdued economy. Sound capitalisation and strong liquidity ratios continue to underpin their financial profiles."

DBS's net profit rose 8 per cent from a year ago to S$1.14 billion for its second quarter, narrowly missing estimates from analysts. By comparison, both OCBC and UOB beat analyst estimates.

UOB reported a 5.5 per cent increase in net earnings for the second quarter to S$845 million. OCBC reported a stronger-than-expected net profit of S$1.08 billion for the same three-month period, up 22 per cent from a year ago.

The three banks are seeing some loan gains from the property segment, be it through residential property purchases in Singapore or, as in the case of OCBC, in the acquisition of real estate in the commercial and hospitality sectors in London, Sydney and New York by its customers.

On Singapore's residential market, UOB's chief Wee Ee Cheong said that there are signs that the Singapore market is bottoming out. But while sentiment has improved and sales have picked up, it was too early to say if the recovery was sustainable as that would depend on the fundamentals of the economy, he said.

DBS's Mr Gupta sees a very clear pick-up in housing activity. This comes as the bank's new bookings in mortgages in the second quarter are at their highest in five years. DBS has a share of 28.7 per cent in the housing loan market as at June 2017.

DBS sees some momentum in loan growth going into the second half of the year. OCBC and UOB are keeping their full-year loan growth forecast unchanged in single digits.

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