DBS Group's results reflect increasing asset quality challenges: Moody's

[SINGAPORE] Moody's Investors Service says that DBS Group Holdings Ltd's (DBS; Aa2 stable) financial results for the full-year ended 31 December 2015 reflect its strong profitability and overall balance sheet strength.

However, asset quality pressures stemming from the group's oil and gas and Greater China exposures point to rising credit costs and weaker profitability in the coming quarters.

DBS reported net income growth of 12 per cent for 2015 to S$4.32 billion, excluding one-time items, supported by stronger net interest margins, as well as higher non-interest income from various sources.

The strong income growth supported the improvement in the group's fully-loaded Common Equity Tier 1 (CET1) ratio to 12.4 per cent, from 11.9 per cent a year ago.

"Like its peer banks, DBS also saw a broad-based deterioration in asset quality through 2015, a trend we expect to continue because of slowing economic and trade growth in Asia, and increasing stress for oil and gas borrowers in Singapore," says Simon Chen, a Moody's Vice President and Senior Analyst.

Chen was speaking on the release of a new report titled "DBS Group Holdings Ltd -- 2015 Results Reflect Balance Sheet Strength, but Also Increasing Asset Quality Challenges".

Compared to its peers OCBC and UOB, DBS reported the largest exposure to oil and gas borrowers at 31 December 2015, including to services companies, which were the most affected by the collapse in oil prices. DBS' exposure to oil and gas services firms amounted to around 24 per cent of its common equity Tier 1 capital.

According to DBS, only 1.3 per cent of loans to oil support services borrowers is non-performing. The quality of the other parts of its oil and gas portfolio remains healthy.

Furthermore, based on the bank's stress test - which assumes that global oil prices remain low, at US$20 per barrel over the next two years (2016/17) - there could be a handful of additional loans that may become non-performing, and which may incur additional provisions of about S$200 million (about seven basis points of total gross loans in 2015).

Given the prolonged softness in the oil and gas markets, Moody's expects DBS will increase its provisions in coming quarters, and in particular against its oil and gas exposures, which in turn will pressure profitability.

Most of the loans are currently collateralized, but Moody's says the value of such collateral - including specialized oil and gas and transportation equipment - will have likely decreased due to weak secondary market liquidity and depressed charter rates.

On DBS' Mainland China exposures, the group maintains that the asset quality of this portfolio remains healthy, with an NPL ratio of 0.6 per cent at end-2015. The group expects some deterioration in the portfolio's quality in 2016, stemming from the slowing economy in China, but expects the incremental increase in credit costs to be manageable.

Although the higher provisions will negatively affect DBS' profitability, Moody's does not expect a material impact on the group's robust capital buffers. Moody's expects DBS will continue to report robust pre-provision income that can cover the expected rise in credit costs.

MOODY'S