Is DBS really past the worst of its O&G loan woes?

 Source: TheEdge Markets   |   Publish date: Fri, 17 Feb 2017, 01:33 PM   |    >> Read article in News website

SINGAPORE (Feb 17): DBS Group chief executive officer Piyush Gupta believes the bank has seen the worst of its woes from loans to troubled companies in the oil and gas support services sector.

Analysts, though, are less convinced.

Speaking to reporters after DBS's 4Q earnings release on Thursday, Gupta said the formation of new nonperforming assets and bad-loan charges for the industry are expected to be "significantly lower this year".

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

DBS in the fourth quarter ended Dec 31 posted a 9% fall in earnings to $913 million on the back of higher allowances.

Total allowances for 4Q and FY16 doubled from a year ago to $462 million and $1.43 billion, respectively.

(See DBS posts 9% fall in 4Q earnings to $913 mil on higher allowances)

OCBC Investment Research lead analyst Carmen Lee says that while the worst in terms of the O&G sector does appear to be over, the outlook is "still dismal".

OCBC is keeping its "hold" call on DBS, but has increased its fair value estimate to $18.99, from $17.83 previously, due to a re-rating of the banking sector.

Lee adds that the research house will change its recommendation to "buy" if DBS's share price drops to $17.80 or lower.

However, Maybank Kim Eng analyst Ng Li Hiang says the woes in O&G support services sector are not yet over.

"While the pace of acceleration in provisions for O&G may be slower in 2017, we think provisions are likely to remain elevated," Ng says in a Friday report.

Ng says Maybank is keeping its "hold" recommendation on DBS as it "await[s] signs of a bottom in asset quality deterioration and/or rising rates". The brokerage raised its target price for DBS by some 16% to $18.13.

Indeed, CIMB analyst Jessalynn Chen believes it could still get worse for DBS.

"It appears the worst for oil & gas is not over after all," Chen says in a Friday report.

Chen notes that DBS faces another $1.25 billion of smaller O&G loans that look weak but have not turned into non-performing loans (NPLs). These companies, she says, could run into trouble "amid falling charter rates and contract terms in the absence of new E&P (exploration and production) spending".

"While DBS shared three anecdotes where it sold vessels above the marked down collateral value, larger purpose-built vessels may be harder to sell or need steeper discounts," Chen adds.

CIMB is keeping its "hold" recommendation on DBS, with a higher target price of $17.66, from $15.40 previously.

RHB, too, believes that DBS will continue to see higher provisions on the back of more non-performing loans.

"We believe oil & gas NPLs would keep provisions escalated," says RHB analyst Leng Seng Choon in a Thursday report.

"Management sees continued stress from the oil & gas sector, and factoring weakness in the SME space, we forecast an even higher NPL ratio of 1.7% at end-2017," Leng says. DBS posted a non-performing loan rate of 1.4% in 4Q, which was 0.9% higher than a year ago and 1.3% higher than 3Q.

RHB is downgrading DBS to "neutral" from "buy", but raising its target price to $19.80, from $18.40 previously.

"On a positive note, 2017 NIM (net interest margin) should widen [to 1.81%] from 4Q16's 1.71% as Fed rate hikes are likely to drive SIBOR higher," Leng says.

As at 1.23pm, DBS is trading 5 cents higher at $18.59.

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