DBS CEO signals bank may be past worst of energy-loan issues

[SINGAPORE] DBS Group Holdings Ltd chief executive officer signalled that the bank may be past the worst of its problems from loans to troubled oil and gas-services companies.

While the sector is "still challenged", the formation of new nonperforming assets and bad-loan charges for the industry are expected to be "significantly lower this year", Piyush Gupta told reporters after his bank's fourth-quarter earnings release.

The comments contrast with the gloomier outlook for energy services offered by Mr Gupta's counterpart at rival Oversea-Chinese Banking Corp on Tuesday, which caused Singapore bank shares to slump and sent DBS to its biggest slide since August 2015.

DBS shares rose 0.6 per cent to S$18.33 as of 1:42pm Singapore time on Thursday, poised for their first advance in four days. OCBC lost 0.2 per cent, while smaller rival United Overseas Bank Ltd was unchanged.

"The provisioning risk is mostly out of the bank's control because the risk is oil price," said Alan Richardson, a Hong Kong-based investment manager at Samsung Asset Management who owns shares of the three lenders. "Oil prices should have already troughed from last year, which means while bad-debt provisions could remain elevated, they are unlikely to escalate."

The banks had set hundreds of millions of dollars aside in the past year to cover souring loans to an industry slammed by lower oil and gas demand, and expectations had been building that the lenders would reveal more provisions in their earnings reports this week.

On that score, DBS and OCBC didn't disappoint: Surging bad-debt allowances, particularly for oil and gas services, caused both lenders to post weaker-than-estimated earnings. DBS reported its lowest quarterly profit in two years, while OCBC's slumped by 18 per cent. UOB is due to publish its numbers on Friday, Feb 17.

Four marine-services companies have defaulted on repayments, the highest profile of which was Swiber Holdings Ltd, which sought judicial management in July. DBS had previously announced S$721 million in total Swiber exposure and may have S$637 million exposure to Ezra Holdings Ltd, CIMB Group Holdings Bhd said in a Feb 2 report, citing its own estimates. Ezra on Feb 3 flagged a possible writedown on a joint venture.

Mr Gupta didn't reveal DBS's specific exposure to Ezra at the briefing, though he did say the bank has S$800 million of nonperforming assets tied to two support-services companies, out of a total US$7.3 billion in exposure to that sector, which doesn't include loans to Swiber. DBS has recovered about S$50 million so far from Swiber, Mr Gupta said.

DBS's allowances for credit and other losses jumped 87 per cent in the December quarter from a year earlier to S$462 million, a "significant part" of which was due to cover the energy-services industry, it said in its earnings filing. The amount was slightly higher than the S$440 million estimated by RHB Research Institute.

"It was a weak set of results on the back of higher O&G losses," Melissa Kuang, an analyst at Goldman Sachs Group Inc, wrote in a note. "On the brighter side, DBS commented that while the O&G service sector remains challenging, new NPA formation should have peaked and will be lower in 2017."

DBS said its bad-loan ratio rose to 1.4 per cent from 1.3 per cent in the three months ended September. Still, the bank had fewer new nonperforming assets in the fourth quarter: S$779 million versus about US$1 billion in the previous three months.

DBS's total loan allowances for 2017 will be "similar" to the amount the lender declared for last year, excluding Swiber, Mr Gupta said. In 2016, those allowances climbed 93 per cent from a year earlier to S$1.43 billion.

BLOOMBERG