- Banks have manageable exposure to oil & gas.
- Selective lending in Malaysia. Most O&G players can ride through this patch.
- Maintain OVERWEIGHT. Catalysts from further earnings deliveries. DBS still our top pick, followed by UOB.
After several good years, the oil & gas sector is in for some rough times, as E&P spending is likely to be scaled back following plunging oil prices. There are concerns about banks’ exposure to this sector, which could be heading towards a shakeout. While there is no specific disclosure, we understand most oil & gas loans are classified under “others”. If so, banks’ maximum exposure works out to 8.3% for DBS, 5.6% for OCBC and 4.7% for UOB vs 5.5% for industry.
Risks are mitigated
Combing through the latest annual reports of Singapore’s and Malaysia’s major oil & gas players, we find that: 1) other than a handful of small players, our universe should be able to withstand this trial; 2) Cosco’s finances could be shored up by its deeppocketed largest shareholder, Cosco Group; 3) Swiber’s finances look shaky with its net debt at 6.5x its market cap; and 4) Singapore banks have been selective, only lending to Malaysian companies with solid balance sheets.
Maintain OVERWEIGHT. We expect the banking sector’s re-rating to continue in 2015 on further earnings deliveries. Waning interest in oil & gas may just benefit banks, through sector rotations. DBS is our first choice, followed by UOB. We remain cautious on OCBC over its ability to extract synergies from Wing Hang Bank.
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