Broker's take: UBS thinks DBS had no prior allowance for S$700m Swiber exposure

UBS on Friday suggested that DBS did not provide for its S$700 million Swiber exposure at all and that specific provisions at the bank look low.

DBS said on Thursday it expects only half of the total exposure of about S$700 million to the Swiber group of companies - comprising loans, bonds and off-balance sheet items - to be recovered because the exposure is only partially secured.

Singapore's largest bank said it will tap its general allowance to provide for the anticipated shortfall, bringing the net allowance charge to S$150 million.

The disclosure, following Swiber's stunning move earlier on Thursday to wind up the company, confirmed market rumours about DBS's significant exposure to the beleaguered oil-services firm.

A fresh UBS report said: "From the statement, it doesn't look like the bank had provided for the exposure at all so far."

"Simply put, (it) adds one more quarter of specific provision charges."

In Singapore, there are two forms of provisions.

One is called a specific provision, which is a portion of earnings set aside for specific loans that are under stress. The second is known as 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 maintain a general provision of at least one per cent of loans and receivables after accounting for collateral and deducting any specific provisions made.

UBS noted that of the expected Swiber-related loss of S$350 million, 20 per cent - or S$150 million - is being provided through specific provisions and the rest 30 per cent - or S$200 million - by tapping into the existing general provisions.

This alone is likely to lower the general provision coverage by seven basis points (bps) to 0.92 per cent. Provisions are calculated as a percentage of all loans.

The average quarterly credit cost over the last five quarters has been around 22 bps, or S$160 million, and the Swiber-related specific provision charge adds another 5-6 bps to this.

And had the bank chosen to provide for the loss fully using specific provisions, the incremental credit charge would have been 13-14 bps - slightly higher than the management guidance of a pick-up of 5-10 bps in credit costs in FY16 versus last year.

"Have the Singapore banks provided enough? We have long argued that specific provisions at the banks look low. This is also true at DBS," UBS said.

In a separate but related report, UBS also suggested that OCBC appears more proactive in its non-performing loan classification, is providing better disclosures and is more prudent overall.

MAS is querying banks on their provisioning decisions, and has made clear that banks should have prudent standards, BT reported this month.

"We don't prescribe provisioning, but in the process of continuous questions, they know that they need to be conservative and prudent when it comes to provisioning. Long before the loan goes bad, you should have provided fully for it," said MAS managing director Ravi Menon at a press briefing.