Weak take-up for Singapore's Tuaspring bid may hit Maybank hard

The bank may make additional top-up in provisions as required.

The dismal market response to Hyflux’s Tuaspring’s power plant bid could easily weigh in on main creditor Maybank who may be forced to shell out more to recover what it invested in the distressed asset, according to UOB Kay Hian.

Also read: Losses may loom for Singapore banks as water treatment firm Hyflux struggles to stay liquid

This comes after Bloomberg reported that Sembcorp Industries was the only party that submitted a final bid for the power plant with an offer lingering below Tuaspring’s book value. This may not be fully sufficient to pay back Maybank whose exposure to the Tuaspring plant is estimated at S$496m.

“As such, the new report from Bloomberg which indicated that the final bid amount will not be sufficient to fully pay off Maybank’s creditors may come as a slight negative surprise to the market, suggesting an additional top-up in provisions may be required,” Keith Wee Teck Keong, UOB analyst said in a statement.

On a worst case scenario where Hyflux rejects Sembcorp’s binding bid on the grounds of low bid price, Maybank’s FY18 earnings may crash by 19.2% and 76% in a single quarter. CET1 and book value will also fall by -20bp and -2.1% respectively.

“We expect a sharp knee jerk reaction to its share price if such a scenario were to indeed pan out. Our FY18 and FY19 earnings forecasts for Maybank Group are currently 4% and 5% below consensus with net credit cost forecasts of 45bp/46bp respectively,” added Keong.

The bank’s absolute gross impaired loan (GIL) ratio also climbed from 2.37% in Q1 to 2.64% in Q2 related to a lumpy impairment of its exposure to Hyflux Tuapspring financing.

Embattled water treatment firm Hyflux's loans and borrowings are bank-dominated, with 51% of its debt in unsecured bank loans and 17% in unsecured notes. Only 32% of its debt come in the form of secured bank loans.

Here’s more from UOB Kay Hian; 

Underlying revenue excluding that from insurance divisions was weak. Excluding its insurance income which can be volatile due to the swing in contract liabilities release and write-backs depending on qoq movements in bond yields, revenue contracted 2.6% yoy in 1H18 and 7.4% yoy in 2Q18. Contraction in fee income on a yoy comparison in 2Q18 and 1H18, sharply lower trading gains and modest 2.1% and 2.6% yoy growth in net interest income respectively impacted both 1H18 and 2Q18 revenue trends. Although, there could be a qoq recovery in non-interest income in 3Q18, we understand that continued pressure on NIM could be an offsetting factor.  

NIM pressure to intensify. Funding cost pressure in both Malaysia and Indonesia resulted in a 12bp qoq and yoy compression in 2Q18 NIM which led to a cumulative 4bp yoy compression in group 1H18 NIM. Management is now guiding for a flattish to single digit NIM compression in FY18 mainly from higher deposit cost pressure in Malaysia and asset pricing pressure in Indonesia vs initial guidance of a mild expansion.