DBS Group Holdings Ltd’s (星展銀行) second-quarter profit declined 6 percent as provisions for troubled energy-services firm Swiber Holdings Ltd overshadowed gains in interest and fee income.
Net income fell to S$1.05 billion (US$779 million) from S$1.12 billion a year earlier, Singapore’s largest bank said in an exchange filing yesterday. That compared with the S$1.07 billion average of five analysts in a Bloomberg survey that was compiled before DBS revealed losses related to Swiber.
Concern has mounted over Singaporean banks’ loans to oil and gas-services providers over the past two weeks since Swiber sought court supervision for its operations amid pressure from creditors. Moody’s Investors Service warned on Thursday last week that funds the banks had set aside to cover souring energy exposures are not enough.
DBS’s net interest margin was bolstered by higher domestic borrowing costs from a year ago, though local rates have since fallen this year.
“Earlier, the expectations were dampened by Swiber and that took the focus away from their core operations, which are quite strong,” He Yuxuan, an analyst at Daiwa SB Investments (Singapore) Ltd, said by telephone yesterday. “What DBS needs to do is to convince investors that their risk management is in place and hopefully this Swiber is a one-off case.”
DBS shares rose 0.6 percent at S$14.93 apiece as of 9:09am local time, paring this year’s loss to 11 percent. The benchmark Straits Times Index rose 0.6 percent.
Swiber, which provides construction services for international oil and gas projects, had sought to liquidate its operations after facing payment demands from creditors, a plan it subsequently dropped in favor of judicial management. That allows the firm to continue business under court supervision while it attempts to turn itself around.
DBS said in a July 28 filing that it expects to recover only half of its exposure to Swiber and its units. The disclosure prompted Goldman Sachs Group Inc and JPMorgan Chase & Co analysts to lower their full-year earnings estimates for the lender.
The Singaporean bank’s exposure to Swiber amounted to S$721 million, according to a presentation accompanying its results. Of that total, S$403 million was to finance working capital for two projects, S$197 million was for June and last month’s bond redemption’s and S$121 million was for mainly secured term loans for vessels, property and hedging purposes.
DBS and its two largest domestic rivals, Oversea-Chinese Banking Corp (OCBC, 華僑銀行) and United Overseas Bank Ltd (UOB, 大華資產管理), 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.
DBS’s total exposure to the oil and gas sector rose to S$23 billion, excluding Swiber, as of June, according to its presentation. That is compared with S$22 billion the previous quarter.
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 in a statement on Thursday last week.
Almost 60 percent of its second half pre-provision income this year would be eroded by loan-loss provisions in that scenario, the ratings company said.
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