What You Need to Know About the DBS – Swiber Saga

DBS Group Holdings (SGX:D05) just reported their latest quarter earnings this week. However, all eyes were on their $721 million loan to Swiber Holdings Ltd, a oil and gas service provider.

In Jul 16, Swiber Holdings Ltd shocked the stock market by suddenly announcing that they will be shutting down its business and filed for liquidation and now is under judicial management. I won’t go deep into all the technicalities of liquidation or judicial management but safe to say, Swiber is in deep financial troubles and could not continue its operations.

Soon after, DBS announced that it has an exposure of a total $721 million in terms of loans to Swiber. The CEO of DBS further highlighted that DBS has an overall exposure of $7 billion to the oil and gas support service sector, and of which he mentioned that about one-third of it has “weakness”. I am going to assume that the “weakness” refers to the inability to recover the loan.

I sense some “weakness” in the force

Following that, DBS’s share price dropped immediately as expected. It fell from a high of $16.40 in July to a low of $14.80 in Aug. Almost a 10% drop!!!

Now let’s calm down and investigate what exactly is the impact.

Banks are in the business of lending money so it is common practice that banks will cater allowances for poor performing loans which they believe may be difficult to recover. These allowances will determine how much money the bank shall set aside for such loans.

In this case, due to the Swiber incident, DBS has set aside $400 million as allowances which means DBS is assuming that they could only recover less than 50% of that $721 million loan. To be honest, I believe that is a conservative move and it earns my approval.

Now, speaking of conservative move, what if we want to be more conservative? Can I assume the worst case scenario that the whole Swiber loan goes to smoke?

Yes you can! and that’s exactly what we are going to do.

As of 30 Jun, DBS has a shareholders’ equity of $42.3 billion. Shareholders’ equity is the total assets minus total liabilities, it also represents the networth of the company.

In the worst case scenario that the Swiber loan cannot be recovered, it will be written-off from the DBS’s book. (Basically, DBS just suck it up and continue operations). However, we want the scenario to be even more “doomsday”, so lets assume DBS lost $3.5 billion which is half of its total exposure to the oil and gas support service sector (edited on 12 Aug).

So we can deduct the $3.5 billion from the shareholders’ equity. With a little bit of math, we arrived at a new networth of $38.8 billion.

Now to know the networth of each DBS share, we can divide the Shareholders’ equity by number of shares (approx 2.53 billion)and we will arrive at a value of $15.35.

This value is also known as Book Value Per Share. It represents the networth of each share of the company.

Now as of 12 Aug, the DBS share price is $14.95. This means you are buying DBS share at a discount of about 3%, even in the worst case scenario!! What???

I can sense that some of you might be asking, “Pete, how can this be?”. And all I have to say is, it is happening and it will continue to.

In the short term, the stock market is a voting machine. In the long run, the stock market is a weighing machine.

Lastly, in the larger scheme of things, the impact is indeed minuscule for DBS. In comparison, DBS’s latest quarterly net profit is a whopping $1.2 billion, and the percentage of non-performing loan is 1.1%!

I don’t know about you but I’m holding on to my DBS shares. In fact, I’m going to buy more since it is on discount!

Disclosure: I own DBS shares.

See you soon!

Investing Always,

Pete

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