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Worsening O&G sector continues to be a drag on DBS' returns

Samantha Chiew
Samantha Chiew • 2 min read
Worsening O&G sector continues to be a drag on DBS' returns
SINGAPORE (Nov 8): Maybank Kim Eng is maintaining its “hold” call on DBS Group with a higher target price of $22.75.
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SINGAPORE (Nov 8): Maybank Kim Eng is maintaining its “hold” call on DBS Group with a higher target price of $22.75.

This came on the back of DBS’ results announcement on Monday. The group’s 3Q17 earnings dropped 25% to $802 million from a year ago.

This was due to an 87% increase in net allowances to $815 million as residual weak oil and gas support services exposures were classified as non-performing assets (NPAs).

Total 3Q17 income rose 4% to $3.06 billion from a year ago due to higher net interest income and fee income. These were however partially offset by a 20% decline in other non-interest income.


See: DBS reports 25% lower 3Q earnings of $802 mil on higher net allowances

In a Tuesday report, analyst Ng Li Hiang says that the group’s 3Q17 earnings came in below the research house's and Bloomberg consensus' expectations.

Hence, Ng has cut FY17 net profit forecast by 8% to factor in higher provisions, but raised FY18-19 net profit forecasts by 6-8% on higher income, and lower expenses and provisions.

Moreover, worsening asset quality from the oil and gas (O&G) support services sector continued to drag returns.

In view of the upcoming International Financial Reporting Standard (IFRS) 9 from Jan 1, 2018 onward, DBS seized the opportunity to recognise another $1.7 billion of new non-performing assets (NPA) in the offshore support vessel (OSV) sector, providing more specific provisions and utilising the excess general provisions it has built (draw down $850 million).

The new NPAs were split equally among the larger five names and smaller name accounts

“With the chunky exposures recognised as NPAs and provided for, we cut FY18-19E provisions by 20-24%, barring any significant deterioration in other sectors,” says Ng.

Meanwhile, the group’s management is optimistic on business momentum.

Due to the improving economic environment, the analyst further increases FY18-19 loan growth forecast to approximately 7-8%.

Among the stocks in the banking sector, the research house prefers UOB due to its disciplined pricing strategy, sensitivity to re-pricing intervals and lowest exposure to O&G sector. Maybank Kim Eng has a “buy” recommendation on UOB with a target price of $27.10.

As at 3.18pm, shares in DBS are trading 21 cents higher at $23.7 or 1.3 times FY17 book with a dividend yield of 2.8%.

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