Following Swiber’s winding up application yesterday (27 Jul 2016), DBS has announced that it has a total exposure of S$700m to the Swiber group comprising loans, bonds and offbalance sheet items. DBS expects to recover half of this as the exposure is partially secured. DBS said it will also provide fully for the anticipated shortfall.

DBS said it will use its surplus general allowances and the net allowance charge will be lower at about S$150m. As an indication, allowances amounted to about S$170m-S$247m per quarter in the last three quarters, and with the additional charge, this will dent FY16 earnings. We were previously projecting FY16 allowances of S$775m and this now looks set to touch almost S$1b this year.

As a recap, the last time allowances were at this elevated level (>S$1b) was during the Global Financial Crisis in FY09 at S$1.55b. The stock has already taken a hit, falling 38 cents to S$15.88 yesterday, or wiping out close to S$958m of DBS’s market capitalization. With the current market concern about the banking sector’s deteriorating outlook, largely due to exposure to several slowing sectors (oil and gas, commodity, property) and markets (Asia, China and Europe), this is likely to result in near term price weakness for banking stocks.

While we have a long term BUY rating on DBS, based on current market environment and weak sentiment, we believe a better re-entry level would be after further price weakness from current level. DBS is releasing its 2Q results on 8 Aug and we will review our earnings estimates and fair value.

Source: OCBC Research - 29 Jul 2016