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NRA Capital Pte Ltd

Written by: Lynn Look

Thursday 4 Aug 2016

Oil and Gas victim - Swiber, what next?

Are the banks safe from contagion effect?

DBS announced that it had S$700m exposure of loans, bonds and off-balance sheet items to Swiber after the latter shocked the market last Thursday with its liquidation plan which was subsequently changed to restructuring under judicial management.

DBS announced that it had S$700m exposure of loans, bonds and off-balance sheet items to Swiber after the latter shocked the market last Thursday with its liquidation plan which was subsequently changed to restructuring under judicial management.

Swiber, a Singapore listed oil services provider, which overstretched itself with huge debt when oil prices were high a year ago, is the first victim of the oil price carnage in the local scene. This is probably the tip of the iceberg as we may see more casualties in the coming months, with oil prices sliding back below US$40/barrel.  

 

DBS has biggest exposure to Swiber; UOB manageable and OCBC none

DBS is Swiber’s biggest creditor. It made two loans totalling US$146m weeks before Swiber filed for liquidation. As the loans made are not fully secured, DBS expects to recover only half of its exposure. It intends to tap on the S$629m surplus general provisionings it set aside in the past and hence will only charge S$150m for its Swiber exposure to P/L this quarter. With Swiber, our S$800m provisionings for this year may seem inadequate should oil price continue to slide.

We are therefore likely to raise this year’s provisionings to about S$1bn (a 35% jump from FY15), assuming the bank does not draw on the S$429m excess general provisionings left after setting aside S$200m for Swiber, raising its credit cost from 25bp (management’s original target) to 35bp (our estimate) for 2016. This will result in a 7% reduction in our current year earnings projection for DBS, assuming all other variables held constant.

The following table shows the oil and gas sector (O&G) exposure of the three local banks as at 30 June 2016.  DBS’ exposure has not been updated as its interim results are due only next week.  Assuming no change in its exposure, DBS will remain the most vulnerable with S$22bn of total exposure to the O&G sector as 70% of its exposure is to the riskier upstream O&G industries, more than twice that of OCBC and UOB.

Total Exposure as at 30 June 2016 (S$bn)

 

 

Oil & Gas

Total

Upstream*

Downstream

 % upstream

% downstream

DBS @

22

        15(9)

7

68%

32%

OCBC

14(13)

          6

7

45%

53%

UOB

14(9)

          5

9

35%

65%

* includes producers and O&G support services  @ as at 30 March 2016

Figures in brackets are on balance sheet exposure

   

 

According to Mr Tsien, OCBC’s CEO, most offshore related companies that expanded their fleet or equipment during the oil price peak would probably only break-even at current levels and he reckons that these companies will be safe only if oil prices rise to US$60/barrel or more. With the current over-supply situation and fragile global economic growth, compounded by Brexit, oil prices are unlikely to hit US$60/barrel in the next 6 months. The worrying concern is that charterers are now renegotiating their contracts and are demanding their charter rates to be pegged on a floating basis, moving in tandem with oil prices, thus passing the risk of bearing falling oil prices to the equipment owners.  

 

Recommendation: SELL DBS ahead of its interim results release next week

With UOB and OCBC reporting substantial NIMs contraction of between 7 to 10bp in 2Q16 in their interim results released last week, DBS is unlikely to escape unscathed. On the contrary, it is likely to see greater NIMs contraction since 80% of its loans are SIBOR and SOR pegged, about twice that of the other two banks. We may see upside surprises from its wealth management and forex trading arms in 2Q but the possibility of higher O&G NPLs in the coming quarters will weigh on its share price, we maintain our SELL on DBS which is currently trading close to its fair value of S$15.


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