SINGAPORE (Nov 30): UOB Kay Hian is keeping its “overweight” call on the Singapore banking sector while maintaining its “buy” recommendations on DBS Group and Oversea-Chinese Banking Corp (OCBC) at target prices of $20.15 and $10.45 respectively.

While United Overseas Bank (UOB) is unrated, the research house has given it a target price of $19.88 and highlights the bank as “more resilient and well-positioned to weather the current credit cycle” given it has the least exposure to the beleaguered O&G sector.  

“We believe Singapore banks have already recognised the larger troubled accounts from the oil & gas (O&G) sector as non-performing loans (NPLs),” shares analyst Jonathan Koh in a Monday report.

UOB Kay Hian has reduced its previously-imposed penalty on DBS while raising its target price, as the research house believes the credit cycle caused by downturn in the O&G sector is “near its trough”.

It also notes that the bank registered the fastest organic growth among its peers during 3Q16, with pre-provision operating profit (PPOP) expanding 19.3% y-o-y.

(See also: DBS posts flat 3Q earnings of $1.07 bil, in line with expectations)

In Koh’s opinion, OCBC’s deterioration in asset quality has been “mild” as new non-performing loans (NPLs) were offset by upgrades for loans which were conservatively recognised as NPLs last year.

“Managements at both DBS and UOB have indicated that large and vulnerable accounts in the O&G sector have already been recognised as NPLs and further increase in NPLs would be manageable,” he adds.

Assuming all NPLs within the O&G sector occur in the offshore support services (OSS) segment, the analyst estimates that DBS, OCBC and UOB have recognised 15.1% (previous: 10.1%), 21.5% (previous: 16.4%) and 31.1% (previous: 17.1%) respectively of loans extended to the OSS segment as NPLs.

Contributing to Koh’s increasing positivity on the O&G sector’s outlook is last week’s announcement by the Ministry of Trade & Industry (MTI) that it will introduce new support measures to help marine & offshore engineering (M&OE) companies.

(See also: Here’s how MTI intends to ease the financing woes of marine & offshore engineering firms)

“We believe these measures were undertaken to preserve jobs in the M&OE industry, which are being threatened by rising corporate defaults… Bridging loans would be particularly useful for SMEs that face short-term cash flow constraints,” comments the analyst.

As at 11.17am, shares of DBS, OCBC and UOB are trading at $17.51, $9.10 and $20.34 respectively.