Swiber Losses Put Focus on DBS Provisions Before Earnings

DBS Earnings Under Pressure From Swiber Losses
  • Singapore banks’ energy provisions may be inadequate: Moody’s
  • DBS shares fall for seven days in longest streak since April

DBS Group Holdings Ltd.’s exposure to a troubled oil-services firm has analysts scrambling to revise their forecasts for the lender and the wider Singapore banking sector ahead of DBS’s quarterly earnings report on Monday.

The changing outlook follows the bank’s July 28 filing that it expects to recover only half of its S$700-million ($522-million) exposure to Swiber Holdings Ltd. and its units, for which it would set aside S$150 million. Shares of Singapore’s largest bank have dropped each day since then, putting the stock on course for its longest losing streak since April.

Analysts started crunching the numbers immediately: the extra provisioning would be taken in the second quarter and cut 2016 earnings by 3 percent, Goldman Sachs Group Inc. said in a July 29 report. JPMorgan Chase & Co. this week questioned DBS’s ability to handle nonperforming loans as it downgraded the lender’s stock. Moody’s Investors Service warned Thursday that the funds Singaporean banks had set aside to cover souring energy exposures aren’t enough.

“The substantial upward revision to DBS’ provisioning for its Swiber exposure is an indication that the current deterioration in the oil and gas industries could have a far stronger bottom line impact on the banks than previously expected,” Moody’s said in a statement.

DBS stock sank 1.3 percent to S$14.84, the lowest intraday price since May 16, as of 12:54 p.m. on Friday. The shares slumped 11 percent this year.

Weak State

Swiber, which provides construction services for international oil and gas projects, filed a petition last week to liquidate its operations, after facing payment demands from creditors. The firm subsequently dropped the liquidation in favor of a plan to operate under judicial management, which would allow it to continue business under court supervision while it attempts to turn itself around.

“Our analysis of Swiber’s listed peers suggests that Swiber is representative of the weak financial state currently prevalent in the broad oil and gas industry,” Moody’s said. “Under these circumstances, we cannot rule out the risk of a broader default of a loss severity akin to Swiber.”

For a Gadfly analysis of DBS’s oil and gas exposures, click here.

DBS and Singapore’s two other large banks, Oversea-Chinese Banking Corp. and United Overseas Bank Ltd., are exposed to the downturn in the energy sector as a result of their lending to local companies which provide construction, shipping and maintenance services to the oil and gas industry. Many of those companies are suffering as the plunge in crude prices since 2014 curtailed exploration and other activity by oil and gas producers.

Under a “severe stress scenario,” DBS would be the worst hit among the three banks because it has the highest exposure to the oil and gas services sector, Moody’s said. Almost 60 percent of its second half pre-provision income this year would be eroded by loan-loss provisions in that scenario, while OCBC and UOB would see losses of 40 percent to 50 percent, the ratings company said.

The financial health of the energy-services companies is the “key concern” for UOB over the next one or two years, Chief Executive Officer Wee Ee Cheong said on July 28 after his bank’s results. The lender’s exposure to Swiber is “manageable,” Wee said, though he noted that the wider difficulties in the oil and gas services industry were a factor behind the 17 percent climb in UOB’s nonperforming assets for the second quarter.

UOB’s exposure to Swiber is more than $35 million, the company’s fourth-largest creditor, the Business Times reported Friday, citing a court document. DBS and UOB are among 13 lenders that extended $736 million in banking facilities to Swiber, the newspaper said. A UOB spokesman didn’t immediately reply to an e-mail seeking comment on the report.

DBS’s capital adequacy ratio is unlikely to be impacted by Swiber’s debt, Chief Executive Officer Piyush Gupta told CNBC in an interview Thursday. The bank’s common equity Tier 1 ratio stood at 14 percent as of March.

“We’ve built a lot of provisions and reserves ahead of time and as best as we can tell, therefore, it is unlikely it will have impact on our capital adequacy or on fundamental strengths of the DBS balance sheet,” Gupta said.

Specific allowances, or provisions for bad debts, rose 6 percent to S$170 million in the March quarter, the bank reported earlier this year. DBS’s total exposure to the oil and gas sector stood at S$22 billion as of March, unchanged from the previous quarter.

Prior to the bank’s announcement on its Swiber exposure, analysts had expected it to report second-quarter net income of S$1.07 billion, a 4 percent drop from a year earlier, according to the average of five estimates compiled by Bloomberg.

In an Aug. 3 report, JPMorgan analysts Harsh Modi and Raunak Mukherjee cut their rating on DBS to neutral from overweight and recommended investors sell the bank’s stock before the results. The analysts cut their forecasts for DBS’s earnings for this year through 2018 by 6 percent. They lowered their share-price target to S$15 from S$16.

“The core tenet of DBS’s investment thesis is the bank’s ability to tide over ongoing NPL cycle better than peers due to shifts in underwriting practices since 2009,” Modi and Mukherjee said. “The abrupt downgrade of S$700 million exposure to Swiber challenges that confidence.”

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