DBS's ability to manage bad loans questioned in JPMorgan report

[SINGAPORE] DBS Group Holdings Ltd's ability to handle nonperforming loans was questioned by analysts at JPMorgan Chase & Co after the Singaporean bank revealed potential losses from its S$700-million exposure to a troubled oil-services firm.

In an Aug 3 report, JPMorgan analysts Harsh Modi and Raunak Mukherjee cut their rating on DBS to neutral from overweight and recommended investors sell the bank's stock ahead of its second-quarter earnings announcement on Aug 8.

Singapore's largest lender said in a July 28 filing that it expects to recover only half of its exposure to Swiber Holdings Ltd and its units, for which it would set aside provisions of S$150 million.

"The core tenet of DBS's investment thesis is the bank's ability to tide over ongoing NPL cycle better than peers due to shifts in underwriting practices since 2009," Mr Modi and Mr Mukherjee said.

"The abrupt downgrade of S$700 million exposure to Swiber challenges that confidence."

Swiber, which provides construction services for international oil and gas projects, filed a petition last week to liquidate its operations, after facing payment demands from creditors.

The firm subsequently dropped the liquidation in favour of a plan to operate under judicial management, which would allow it to continue business under court supervision while it attempts to turn itself around.

The JPMorgan analysts cut their forecasts for DBS's earnings for this year through 2018 by 6 per cent. They lowered their share-price target to S$15 from S$16. The stock last traded 0.3 per cent lower at S$15.05 as of 4 pm on Thursday.

"There is a risk that investors' perception on DBS's asset quality pivots back to the bank's track records during the 2008-2009 cycle, limiting the upside of the stock," the analysts wrote.

BLOOMBERG