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.
