Coastal Oil's liquidation unlikely to impact local banks, trigger O&G contagion: CGS-CIMB

Coastal Oil's liquidation unlikely to impact local banks, trigger O&G contagion: CGS-CIMB

By: 
PC Lee
10/01/19, 12:04 pm

SINGAPORE (Jan 10): CGS-CIMB Securities is maintaining OCBC and UOB at “buy” despite customer Coastal Oil Singapore having gone bust.

The company has outstanding debts of US$354 million, US$29.9 million which is owed to DBS, US$122.7 million to OCBC and US$19.5 million to UOB.

“We think that further widespread deterioration of the O&G sector following Coastal Oil’s liquidation is unlikely,” says CGS-CIMB analyst Andrea Choong.

In the worst-case scenario of incurring full provisions, credit costs could rise by 1-6bp which should not impact non-performing loan (NPL) ratios for the three banks.

Recall that in 2H17, the Singapore banks cleaned up their books with the accelerated recognition of vulnerable oil and gas (O&G) exposures.

At that time, DBS -- with $5.3 billion O&G exposure or 2% of total loans -- was hit the hardest with 109bp of credit costs in 3Q17, while OCBC -- at $12.6 billion or 5% of loans -- and UOB  -- at $10.7 billion or 5% of loans --  were less impacted, booking 30bp and 24bp of allowances in 4Q17.

On Jan 3, DBS seized two of Coastal Oil’s vessels -- Atalanta and Coastal Neptune -- on grounds of US$5.4 million ($7.3 million) and US$3.6 million of mortgage claims; estimated values of the vessels were US$15.6 million and US$7.8 million, respectively.

CGS-CIMB believes that provisions would have been progressively set aside for Coastal Oil given the likely weakening of cashflows leading up to liquidation.

Without taking into account provisions or other collateral, conservatively, DBS’s credit cost would be pushed upwards by 1bp to 24bp in FY19, OCBC by 6bp to 19bp and UOB by 1bp (to 19bp.

“These ‘higher’ levels remain below the average of 27-48bp in FY16 when oil prices were at an all-time low,” says Choong.

DBS’s ratio would rise to 1.57% from 1.56%, OCBC’s to 1.44% from 1.38% and UOB’s to 1.65% from 1.64% since gradually creeping up from 1.0% for DBS and OCBC and 1.4% for UOB in 1Q16.

CGS-CIMB has OCBC and UOB at “add” with target prices of $14.00 or 10.8x FY20F earnings and $31.00 or 11.4x FY20F earnings while DBS gets a “hold” with target price of $27.00 or 10.7x FY20F earnings.

As at 11.53am, shares in OCBC, UOB and DBS are trading at $11.62, $25.74 and $24.36 respectively.

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