RHB Research 2015-07-28: DBS Group Holdings - DBS’s 2Q15 earnings came in within expectations. Maintain BUY.

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DBS’s 2Q15 earnings came in within expectations. 

• Reiterate BUY with unchanged TP of SGD23.30 (10.5% upside), which implies 1.5x FY15F P/BV. 
• Strong fee income growth, a 6bps NIM expansion and benign impaired loans are key factors that lifted 1H15 net profits by 12% YoY. 
• DBS is our preferred Singapore bank stock given its strong underlying operations and robust balance sheet. 

 2Q15 results in line. 

• DBS posted core earnings of SGD1,117m (+15% YoY, -1% QoQ) in 2Q15, bringing 1H15 earnings to SGD2,250m (+12% YoY) – which makes up 50-52% of our and consensus FY15 estimates. 
• Excluding one-time items, 2Q15 total income fell 2% QoQ on a 9% QoQ drop in non-interest income (non-II) following the bump-up in trading and investment income in 1Q15 (+137% QoQ to SGD456m). 
• A 24% QoQ decline in impairment charges cushioned the fall in core net profit. 

 Highlights are: 

1. healthy fee income growth of 4% QoQ with fees from investment banking (+100% QoQ), brokerage (+24% QoQ) and wealth management (+5% QoQ). Investment and trading income fell 31% QoQ but rose 33% YoY; 
2. net interest income (NII) rose 3% QoQ mainly on the 6bps QoQ net interest margin (NIM) expansion as loans were flat QoQ; 
3. asset quality was resilient with gross impaired loans (GIL) down 1% QoQ (1Q15: +3.5% QoQ). Its GIL ratio was stable at 0.88% and loan loss coverage was a comfortable 147%; and 
4. CET-1 (fully-loaded basis) is unchanged at 12.3% (Dec 2014: 11.9%, Mar 2015: 12.2%). 

 Management guidance: 

1. annualised 1H15 loan growth of 3.3% falls short of its revised target of +6% YoY for FY15. Still, it believes loan growth of 5% YoY is possible with new mortgage bookings and deal-led lending flowing through in 2H15; 
2. stable NIM in 2H15 with pressures from funding costs and China (it is anticipating another rate cut) being offset by loan re-pricing; 
3. annuity fee income to remain robust but trading income would be volatile; and 
4. GIL to grind higher but asset quality would remain healthy, with credit cost close to FY14 levels. 

 Still a BUY. 

• We fine-tuned our FY15F-17F earnings by 0.5-3% but kept our GGM-based TP at SGD23.30, valuing DBS at 1.5x FY15F P/BV against 11.6% ROE. DBS remains our preferred pick among Singapore banks given its strong underlying operations and healthy balance sheet. 
• DBS declared an interim DPS of 30 cents (1H14: 28 cents).

(Singapore Research)

Source: http://www.rhbgroup.com/