DBS glides ahead of peers on sounder oil-and-gas exposure

Singapore

THE greater focus on asset quality in the third quarter has put distance between DBS Group and its two local competitors. And amid the dour outlook, Singapore's largest bank seems to be most optimistic about loan growth and profitability, while OCBC Bank appears to have the greatest concern of the trio.

DBS Group has not only seen no change in its level of bad loans over six quarters, it is also confident of the asset quality of its loans linked to both China and the troubled oil-and-gas sector. Its non-performing loans (NPL), as a proportion of all loans, stood at 0.9 per cent.

DBS sees no clear stress in its oil-and-gas loan profile, said its chief executive Piyush Gupta. "Even if you assume long-term, sustained oil price compression in the next two years, this is not something that is going to be material to our credit profile."

Figures from its peers tell a less comfortable story, even as all three posted earnings that beat expectations.

At United Overseas Bank (UOB), the NPL ratio rose to 1.3 per cent in the third quarter from 1.2 per cent a year ago due to a few large NPLs in the oil and gas services industry. Its NPLs are coming in from the markets of Singapore, Indonesia and Greater China.

At OCBC, bad loans rose to 0.9 per cent from 0.7 per cent a year ago. This reflects souring loans in the oil-and-gas sector; the bank is working on restructuring certain loans in the sector that are under stress, said chief executive Samuel Tsien. The last time OCBC's NPL ratio reached 0.9 per cent was in June 2012.

Macquarie said that it remains "comfortable - but watchful - on OCBC's asset quality", noting that the issues are concentrated in the oil-and-gas segment, and that the higher NPL had been mainly driven by rescheduled loans.

OCBC was also the only one where net interest margin (NIM) fell. This measure of loan profitability fell to 1.66 per cent from 1.68 per cent a year ago. The bank recorded better spreads from customer loans in Singapore, but these were more than offset by the lower ratio of loans to deposits, and lower money market gapping income. Banks needs to balance the take-in of deposits - on which they pay interest - against loans - on which they earn interest.

DBS, which has the lion's share of deposits in Singapore, grew its loans faster than its deposits in the quarter. Its NIM surged 10 basis points to 1.78 per cent, the highest in four years. It displaced UOB, which often trumped the competition on margins.

Still, UOB also notched an increase in NIM, up six points at 1.77 per cent, due mainly to improved loan yields as the loan portfolio repriced on rising interbank and swap offer rates in Singapore.

UOB and DBS have kept their earlier forecast of about 5 per cent growth in loans for the full year. But OCBC's chief lowered loan growth expectations to a low single digit, from the mid-single digit forecast in July. This comes amid weak loan and investment demand in the quarter due to interest rate volatility and uncertainty from China over its economic growth, he told reporters last week.

OCBC posted a 27 per cent drop in net profit to S$902 million, due to the one-off gain in the same period a year ago from the group's increased stake in Bank of Ningbo. Stripping that out, the core profit of S$902 million for the third quarter was 7 per cent higher than the S$841 million a year ago.

OCBC was also hit by lower profit from life assurance, due to unrealised mark-to-market losses from bond and equity investments.

UOB posted a net profit of S$858 million for the quarter, down one per cent on higher staff and branding costs. CIMB noted that the earnings were mainly driven by one-off sales of investment securities. "Despite the earnings beat, we expect the credit cycle to be a challenge in Asean," the brokerage said.

DBS closed the third-quarter results season for the banks with a 6 per cent rise in net profit to S$1.07 billion. "While the results were in line, we believe the market will like the quality," said a Nomura report. "We reiterate our buy rating . . . the stock is cheap and higher interest rates could help drive earnings despite pedestrian loan growth in the near term."

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