SINGAPORE (Feb 3): CIMB Research remains “underweight” on Singapore banks given that asset quality concerns still loom, especially since Ezra Holdings today announced the possibility of a US$170 million ($240 million) writedown.

(See also: Ezra warns of possible US$170 mil writedown, clarifies media reports)

Assuming that each company’s debt is equally split among its principal bankers, the research house estimates that DBS has the largest exposure to the Ezra group of companies at $637 million, followed by OCBC at $300 million and UOB at $166 million.

“DBS’s larger exposure is mainly due to its lending to EMAS Chiyoda Subsea, given that it was the co-lead arranger for the loan facility for EMAS Chiyoda’s main vessel, the Lewek Constellation,” says CIMB analyst Jessalynn Chen in a Friday report.

In the event the entire group goes into liquidation, all three banks will have to recognise their exposures as non-performing loans (NPLs) and make adequate provisions for the unrecoverable amounts.

Based on a 40-80% writedown in book value of fixed assets across the group, Chen estimates DBS will have to make specific provisions (SPs) of about 8-16 basis points (bp), compared to SPs of 9-12bp and 6-7bp by OCBC and UOB respectively.

Commenting that its share price has “done well amid expectations that it will benefit the most in a rising rate environment”, Chen points out that DBS’ “chunky exposures to risky names” such as Ezra could stand in the way of it seeing earnings growth in FY17.

She also notes that OCBC remains “most bearish” on its NPL outlook and oil & gas (O&G) exposure, especially since its loan growth continues to lag behind peers.

UOB, on the other hand, is most exposed to small medium enterprises (SMEs), private property and investment property mortgages, all of which the analyst believes could see deteriorating asset quality.

“Despite higher oil prices and the introduction of new working capital loans by SPRING Singapore, the banks’ exposure to oil & gas firms still remain under stress as E&P spending has yet to return. We are also watchful of the banks’ exposure to the SME sector and trading firms that could be hurt by the stronger US dollar,” cautions Chen.

Additionally, CIMB remains less optimistic than consensus on the bank’s net interest margin (NIM) outlook in 2017 as it believes weak loan demand could put pressure on customer loan yields.

DBS and UOB have been rated “hold” at a target prices of $15.40 and $18.42 respectively, while OCBC remains the research house’s top “sell” pick at a target price of $8.18.

As at 4:24pm, shares of DBS, UOB and OCBC are trading at the respective share prices of $18.69, $20.44 and $9.43.