Finance

Andy Mukherjee is a Bloomberg Gadfly columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.

If tropical Singapore had seasons, what its biggest bank just did would qualify as spring cleaning.

DBS Group Holdings Ltd. is finally taking the broom to its exposure to troubled borrowers in the city's oil-services industry with a S$1.65 billion ($1.22 billion) loss provision in its latest financial results. As much as S$1.3 billion of that is on the bank's Singapore portfolio, which is where it still has S$1.7 billion to recover from "residual" stressed borrowers. While DBS had cautioned previously about heightened credit costs, the amount earmarked for its Singapore portfolio is 19 times the average allowance in the previous 12 quarters.

Here Comes the Broom
DBS made an outsize S$1.3 billion loss provision on its Singapore portfolio in the third quarter
Source: Company reports

So why is CEO Piyush Gupta acting so conservatively all of a sudden, when global oil prices appear to be stabilizing around a two-year high of $55 a barrel? The answer lies in accounting norms.

Banks have two sets of loss buffers: general and specific. DBS can dull the blunt edge of specific delinquencies by raiding its general provision account, and not putting the entire burden of corporate nonpayments on any one quarter's profit. That's what Gupta did. By helping himself to S$850 million from the S$3.5 billion general provision account, he managed to cushion the decline in earnings to 23 percent for the September period.  Without that help, the S$1.65 billion allowance would have wiped out most of the quarter's S$1.8 billion pre-provision profit.

Come January 2018, this little maneuver won't be possible. Under a new international accounting standard, known as IFRS 9, any extra cushion in a general loss buffer will have to be swept into shareholders' funds as retained earnings, or converted into a regulatory reserve. If DBS tries to make S$1.6 billion in loss allowances next year, it will have to charge the entire amount against quarterly profit with no help from general provisions.

Belly Up
Singapore's oil services firms have seen shareholder value erode by more than 80 percent
Source: Bloomberg

While the extra provisioning seems like the prudent thing to do, investors aren't overly impressed. The stock, which has risen 54 percent over the past year, slipped more than 1 percent as of early afternoon in Singapore.

Disappointment over the earnings miss is understandable. With 80 percent of shareholder value in the offshore-marine industry having vanished in the past three years, it's reasonable for shareholders to ask why DBS waited this long to clean up its Singapore balance sheet.

The CEO's promise that specific provisions next year will be no more than 0.27 percent of loans, compared with 1.95 percent in the September quarter, suggests that the lender believes its bad-loan problem to be finally over. Should Gupta's kitchen sink start overflowing again for some reason, investors will be far less forgiving.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Andy Mukherjee in Hong Kong at amukherjee@bloomberg.net

To contact the editor responsible for this story:
Matthew Brooker at mbrooker1@bloomberg.net