DBS says Swiber had no overdue payments with it

Singapore

DBS said the projects financed by Swiber Holdings were on track, and that it had no overdue payments with the bank. However, an equity injection meant to reduce Swiber's high gearing fell through.

The bank, in responding to queries from The Business Times, confirmed that DBS had provided a bridging loan to be repaid upon the expected equity injection from the investor. This loan is understood to have gone towards the recent redemption of two bond issues, worth S$205 million in total.

"The investor failed to follow through on the equity injection per the investment agreement," said a spokeswoman.

DBS said Swiber, with its orderbook of more than S$1 billion as at end-June 2016, was involved in major projects with strong counterparties. It noted that Swiber's track record went back more than a decade, and that it was also refinancing some vessels to raise cash.

DBS's comments come amid questions about the bank's credit-risk assumptions, following the hard knock from its S$700 million Swiber exposure. This is as its single net allowance charge for Swiber - now headed for judicial management - is now 75 per cent of its assumed allowance for the entire oil-and-gas portfolio in a stressed scenario.

Analysts are pointing to the bank's statement for its first-quarter results, when the bank said that if oil prices stayed at US$20 per barrel for a prolonged period, its allowance related to the oil-and-gas sector would not be more than S$200 million.

But its net allowance charge for its Swiber exposure is S$150 million.

Fitch Ratings analyst Ng Wee Siang told The Business Times: "The bank may have to re-examine the assumptions used in its stress test."

The net provision for its Swiber exposure comes from tapping its general allowance of S$200 million to provide for the anticipated shortfall, and after it expects only half of the S$700 million total exposure - S$350 million - to be recovered, as that part of the exposure is secured.

There are two forms of provisions in Singapore: Under a specific provision, a portion of earnings is set aside for specific loans under stress.

The other is a general provision, which is an overall cushion against loans that may, even in the ordinary course of business, come under stress.

Under Monetary Authority of Singapore (MAS) rules, Singapore banks must always keep a general provision of at least one per cent of loans and receivables after accounting for collateral and deducting specific provisions.

Questions are now mounting over how DBS could have estimated an allowance of S$200 million this year for the sector, if it was already exposed so significantly to Swiber, one of the overleveraged players in the market.

DBS did not make an allowance for its S$700 million Swiber exposure at all, said a UBS report. Other analysts also confirmed that this was so."Simply put, (it) adds one more quarter of specific provision charges," UBS said.

At the heart of this debate is how banks define a bad loan - to then be cushioned with a charge against earnings via provisions - according to MAS rules. Some divergence has emerged between assumptions by DBS and UOB, against those by OCBC, analysts noted.

Under MAS rules, a bank must broadly classify a souring loan as substandard, doubtful, or a loss - as soon as a default occurs. The bank should also classify a loan in one of these bad-loan buckets when it has granted "concessions to a borrower because of a deterioration in the financial position of the borrower, or the inability of the borrower to meet the original repayment schedule", MAS said.

Analysts have noted that here, standards can diverge according to interpretations of the rules. Banks need not classify loans as souring assets if the "concessions" do not lead to a loss in parts of the loan, so goes the typical interpretation.

In other words, the bank should take a hit when it can recover only S$90 million of a hypothetical S$100 million loan following a revision of the lending terms such that the bank gets a rawer deal. But it doesn't necessarily have to, if the loan has been restructured such that the principal (S$100 million) is intact, but the tenure is extended so that the full loan is paid down in, say, seven years, instead of the original five.

OCBC takes a different tack from its two domestic competitors. It classifies a loan as restructured as long as the terms in the loan have been changed - even when the bank is set to get principal and interest back. BT understands that from the bank's point of view, it takes seriously MAS's point that a loan is restructured "because of a deterioration in the financial position of the borrower". "We follow the spirit of the law," said a source.

At OCBC's recent results briefing, the bank's chief executive Samuel Tsien said that, given such volatile times for oil-and-gas companies, the only way to protect exposure is to get customers to de-leverage. The bank approaches customers to get them to restructure their loans; it does not wait for customers to get into trouble before restructuring the debt.

OCBC upgraded some customers from a "substandard" category following a restructuring from five quarters ago, and tracks the performance of a restructured loan for longer than is expected from MAS, before upgrading the asset, Mr Tsien said.

"We take a fairly conservative attitude to make sure that it (oil exposure) doesn't create volatility for us," he said at the briefing; he added that the term "non-performing" is not an adjective that reflects how the bank decides on classifying bad loans.

To be clear, DBS said it is taking surplus funds from its general allowance. DBS had cumulative general allowances of S$3.18 billion in the first quarter, and its surplus general provisions - over what counts as Tier-2 capital - is S$629 million. DBS's total allowances in the first quarter fell about 30 per cent from a year ago, after it chose not to add to its general allowance, describing its general allowance at the time as "healthy".

Given the surplus, the S$200 million taken from the general provision for the Swiber exposure would not hit the bank's capital, analysts said.

DBS's additional specific provisions of S$150 million for Swiber make up 3 per cent of CIMB's 2016 estimate of net profit for the bank.

If there are no other net new non-performing assets and provisions other than from Swiber, CIMB estimates DBS's non-performing loan (NPL) ratio will inch up to 1.2 per cent from the first quarter's one per cent. Under this scenario, it would still have enough allowance to cover all of its bad loans.

Still, as CIMB's report put it: "NPL reality hits." "Further NPLs and provisions are likely for the oil-and-gas sector. Oil-and-gas support services firms remain highly geared, and those with notes due in 2016-18 could be at higher risk of default."

DBS releases its results on Aug 8.

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