SINGAPORE (THE BUSINESS TIMES) - DBS on Thursday (April 30) guided that its oil-and-gas (O&G) lending portfolio at $23 billion makes up its single-largest loan exposure to impacted industries made vulnerable by the Covid-19 pandemic, and that it expects further allowances set aside specifically for O&G support services.

This comes as the bank reported a 29 per cent fall in Q1 net profit that brought its earnings to its lowest level since 2017. Singapore's largest bank opened the results season for the local trio with a large bump in allowances set aside to prepare for hits from the Covid-19 global pandemic.

As at 9.51am, shares of DBS were trading at $19.89, up 69 cents or 3.6 per cent.

"Credit cost will depend upon duration of the slowdown and how collateral values evolve," said Jefferies analyst Krishna Guha in a note on Thursday, while keeping a "buy" rating on the stock.

"Capital buffer, earlier digitalisation efforts and ample system liquidity put the bank in good stead to face the crisis."

The virus outbreak, which began in late December last year, has roiled global economies and added to the severe stress in the oil industry.

The bank has identified eight industries more directly impacted by slowdown in its Q1 update. They are: O&G, aviation, hotels, gaming/cruise ships, tourism, retail, food and beverage, as well as shipping.

Of its loan exposure to the "impacted industries", O&G makes up the single-largest sector with lending totalling $23 billion.

As an indication, the specific provisions of $383 million taken by DBS reflect one loan to an oil trader that was recognised as a non-performing asset in the quarter. It did not identify the oil trader.

Of the total $5 billion loans to oil traders, 50 per cent are backed by bank letters of credit. It also lends to global traders or state-owned companies.

In its lending to support services, three-quarters of its lending exposure - that is, $3 billion out of $4 billion - have been recognised as non-performing assets. The bank expects to take further specific provisions on its exposure to support services, it said.

As it is, the bank said it has taken a conservative stance in Q3 2017 to recognise soured exposure to support services, and has marked down collateral.
It has a $7 billion loan exposure to oil producers, mainly to oil majors and state-owned companies, the bank said.

The bank showed that of its loans of $221 billion to large corporates - that is, excluding small and medium-sized enterprises (SMEs) - lending to those in "impacted industries" stood at $46 billion, or 20 per cent of that loan book.

Total specific allowances translate to 35 basis points (bps) of loans. The bank guided that credit costs are to rise to between $3 billion and $5 billion - reflecting 80-130 bps of loans - cumulatively over two years.

This could mean an average of 67 bps of credit costs each year unless all are frontloaded, said CGS-CIMB analyst Andrea Choong in a flash note. She kept her "hold" rating on the counter.

Total provisions set aside stood at $1.086 billion, comprising a $703 million cushion under general allowances, and the remainder for specific accounts that have gone sour.

Of that $46 billion loan exposure to "impacted industries", loans to Singapore Inc companies by DBS made up $5 billion.

The bank has an SME loanbook of $39 billion, 10 per cent of which is exposed to highly impacted industries such as hotels, food and beverage, and retailers.

Almost 90 per cent of SME exposure is in Singapore and Hong Kong, with that predominantly secured against property. Lending criteria to SMEs have also been tightened over the past two years, the bank guided.

Its non-performing loan ratio ticked higher to 1.6 per cent, from 1.5 per cent.

DBS maintained its quarterly dividend payout at 33 cents, but flagged that it would "adjust dividend policy as appropriate" according to its ongoing assessment of the impact of the Covid-19 crisis on performance, credit costs and capital ratios.

Its net profit for the first quarter for the three months ended March 31, 2020 dropped to $1.165 billion compared with $1.651 billion from the same period a year ago. This is in line with an average estimate of $1.13 billion from four analysts polled by Refinitiv.

The bank guided that its full-year profit before allowances to be around 2019 levels after factoring in declines for the rest of year.

DBS's stress-test scenario offers a look at how lenders now see the crisis unfolding.

The bank estimated as a base scenario that lockdowns in major economies continue until mid-2020, gradual recovery is seen in the second-half of the year and continues through to muted growth in 2021, while financial markets correct by an overall 20 per cent this year.

The bank set its stress scenario by assuming that lockdowns in major economies continue through to end of the third quarter, with economic activity in 2021 "still materially below" 2019 levels, and financial markets to correct by 50 per cent in 2020.

Under these scenarios, resulting impact on credit costs was comparable to the 2002-03 period and during the global financial crisis in 2008-2009.

A Citi report had said that past recession peaks in credit-cost terms stood at up to 200 bps in the Asian financial crisis, and 100 bps in the global financial crisis.

The bank has also provided loan moratoriums for more than 1,800 corporate facilities representing over $3.4 billion in total loans outstanding. It has also availed $3.2 billion in loan facilities to Singapore SMEs under the government relief programme.

In the housing segment, DBS said its mortgage book stood at $75 billion in total, with minimal losses expected, as in past crises. Close to 8,000 mortgage principal and interest payment applications have been deferred, representing $4.7 billion in loans outstanding.

Net interest margin (NIM) stood at 1.86 per cent for the first quarter, unchanged from a year ago, and down from 1.88 per cent a quarter ago. The bank flagged the lag effect, saying that the NIM in Q1 does not reflect impact of recent interest rate cut. This will only be seen from Q2. Net interest income was up 7 per cent to $2.48 billion.

Fee income rose 14 per cent from a year ago to $832 million, while gains in investment securities boosted its income from other non-interest activities by 39 per cent to $712 million.