DBS's S$17b exposure to O&G sector in focus

Singapore

DBS's upcoming second-quarter results briefing on Aug 8 is likely to be dominated by questions over its S$700 million exposure to failed Swiber Holdings and the consequent S$150 million hit to its earnings.

That probably means Q2 net profit - instead of an estimated S$1 billion plus - will probably be lowered by SS$150 million.

Prior to news of Swiber's collapse, five analysts had estimated that DBS would post Q2 net profit of around S$1 billion, according to Bloomberg.

Oil services firm Swiber went belly up on July 28 and is now under judicial management.

The expected grilling will zoom in on how DBS, given that it is the company's main banker, failed to see signs that Swiber was having cash flow problems amid contract delays from the latter's customers.

DBS chief executive Piyush Gupta will have to show that he is on top of the bank's S$17 billion exposure to the oil and gas sector, which accounts for 5.9 per cent of its loan book. After all, it was only in May when he said that he didn't see any imminent signs of weakening in the bank's oil and gas exposure.

DBS has said that of its S$700 million exposure to Swiber, it expects only half of this to be recovered because the exposure is only partially secured. It said that it would tap its general allowance to provide for the anticipated shortfall, taking its net allowance charge to S$150 million.

"Management intends to take the required specific provision upfront and bite the bullet in 2Q16," said Jonathan Koh, UOBKayHian analyst in an Aug 1 note.

The estimated specific provision of S$150 million would be charged to profit & loss for Q216 after writing back surplus general provision of S$200 million, he said. DBS has sufficient surplus general provision of S$629 million on its balance sheet as at March 16.

"We estimate that net profit would be reduced by 12.8 per cent to S$882 million for 2Q16," said Mr Koh.

While Swiber's collapse and Singapore banks' continued exposure to the struggling oil and gas sector remains front and centre, investors will also want to see how DBS is performing amid a lower for longer interest rate environment and a sluggish economy.

Rivals OCBC Bank and UOB reported their Q2 results last week.

Some analysts think that DBS's loans may stabilise after falling in Q1 and that its margins may take less of a dent as the bank is better at managing its deposits cost.

One analyst said that a meeting with DBS management (pre-Swiber) suggested that Q2 loan growth would be healthy from market share gains in mortgage and deal-related lending.

Bank lending continues to slide in a weak economy. The official forecast for full year 2016 growth is in the range of 1-3 per cent. Business lending fell 6.2 per cent to S$345 billion in June 2016 from a year ago - a contraction not seen since October 2009.

Business loans have been falling for 10 straight months now. Overall, bank lending in Singapore fell by 2.7 per cent in June year on year.

A bright spot is consumer loans, mainly boosted by mortgages, which rose 2.8 per cent in June from a year ago to S$245 billion, rising at the same pace in May.

The Q2 numbers of OCBC and UOB week were not sparkly - loans were flat at OCBC and up 3 per cent at UOB. Margins fell as interest rates plunged in the March to June period.

The key 3-month Sibor rate which is used to price home loans has fallen to 0.87 per cent from a January high of 1.25 per cent while the 3-month SOR used for commercial loans has plunged to 0.84 per cent from its January high of 1.76 per cent.

At OCBC, net interest margin (NIM) dropped seven basis points from a quarter ago while at UOB, it fell a bigger 10 basis points.

DBS's total loans in Q1 fell due to continued trade loan contraction but that should begin to level off, said Mr Koh.

DBS's CASA or current account/savings account ratio is superior to its rivals, so the hope is that NIM compression won't be as bad as theirs, said a third analyst.

CASA deposits pay zero or almost nothing to savers so DBS's CASA ratio of 62 per cent to total deposits as at end-March should help mitigate the impact of declining rates. OCBC's and UOB's CASA ratios are 49 and 43 per cent respectively.

As for DBS's non-interest income, there could be higher fees from doing two IPOs in Q2 - ManuLife US Reit and Frasers Logistics & Industrial Trust. Higher credit card fees is also likely from the Great Singapore Sale. OCBC and UOB also got nice boosts from credit card fees in Q2.

More of a wild card is trading income. UOB enjoyed higher trading income but it was flat at OCBC in Q2.

READ MORE: Thirteen lenders extended over US$736m of facilities to Swiber group