DBS Group Holdings Ltd (SGX: D05) released its 2016 annual report in late March. The bank’s annual report is a good place for investors to look back at what happened to its business in 2016. As a brief background, DBS Group is one of the three major banks based out of Singapore and is the largest bank in the country by asset size. DBS Group is also a leading financial services group in Asia, with 280 branches across 18 markets. In its 2016 annual report, DBS Group shared two major headwinds it encountered during the year. Hedging risk in China…
DBS Group Holdings Ltd (SGX: D05) released its 2016 annual report in late March.
The bank’s annual report is a good place for investors to look back at what happened to its business in 2016. As a brief background, DBS Group is one of the three major banks based out of Singapore and is the largest bank in the country by asset size. DBS Group is also a leading financial services group in Asia, with 280 branches across 18 markets.
In its 2016 annual report, DBS Group shared two major headwinds it encountered during the year.
Hedging risk in China
Piyush Gupta, DBS Group’s chief executive officer, outlined the first headwind that the bank faced in 2016:
“First, over the past five years, we built up capabilities to provide risk management and hedging solutions for our exporter clients in Greater China.
In essence, exporters tend to be disadvantaged when their home currency strengthens versus the dollar, so they were hedging against a consistent appreciation of the RMB.”
Unfortunately, the hedging solutions provided by DBS Group did not pan out in all cases.
“For the vast majority of our customers, the hedge worked as it was meant to.
However, in some cases, the benefit of the hedges did not accrue as intended because of two reasons – either the importer (our client’s counterparty) forced a renegotiation of terms, so that the benefits of the currency weakness did not pass on to the exporter, or the tenor of the hedges did not foresee and factor the reversal of the business cycle.”
Gupta conceded that, in this case, DBS Group learnt that it needed to have a better understanding of the dynamics between its customers and their clients. DBS Group has set aside allowances for several small and medium enterprises in Hong Kong and China for this hedging exposure.
The oil and gas debacle
Gupta said that the biggest challenge for DBS Group in 2016 came from the oil and gas support services sector. In his own words:
“…. our biggest challenge was undoubtedly in the oil and gas support services sector. This is a big industry for Singapore, in which we have a meaningful market share.
Exposures had built up in the 2012-2014 period, when consistently rising oil prices caused several of our clients to take an expansionary view of their business. The crash in prices from USD 130 to USD 30 per barrel in the second half of 2014 put strain on the sector, which was to be expected.”
In essence, as Singapore’s largest bank, DBS Group has meaningful exposure to the oil and gas support services sector. This market share returned to bite the bank when oil prices headed south in the second half of 2014.
Gupta outlines what the bank has learnt from the oil and gas debacle:
“In hindsight, the extent of the liquidity squeeze on the industry was unexpected, as major oil companies renegotiated contracts and new contracts dried up.
This had the biggest impact on a small sub-segment of our portfolio – the contractors. We have taken away several lessons from this episode, including revisiting our credit policies for contractor financing.”
On contractors, Gupta is likely to be referring to the case of Swiber Holdings Limited (SGX: BGK), which is under judicial management at the moment. The depth and impact of the liquidity squeeze in the sector was a surprise to DBS Group.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong doesn’t own shares in any companies mentioned.