DBS GROUP HOLDINGS LTD
D05.SI
DBS Group - Slower IB-related fees, no NPL red flag yet
- 3Q net profit (S$1,066m) was within our expectations but above consensus.
- Positives were margin expansion, muted credit costs. Negatives were slow IB, WM brokerage fees, treasury. Weak 3Q market-related income featured for all banks.
- NPL (0.9%) and SPs (20bp of loans) was stable, more GPs saw total provisioning rise 30% qoq; albeit all these were lower-than-expected. 3Q ROE was 11.6%.
- We roll forward our target price to S$19.58 (1.16x CY16 P/BV). Maintain Add. Shortterm catalyst is a recovery in capital markets; medium-term, rising interest rates.
Best net interest margins in four years
- DBS 3Q15 NII (+4% qoq) looked the best among peers on a combination of margin improvement (+3bp) and loan growth (+2%); albeit partly helped by forex.
- DBS’s best NIMs in four years, came from S$ loan re-pricing (rising SIBOR) and efforts to rein in deposit costs.
- Forex inflated headline loan growth.
- Underlying loans (-1% constant currency) saw a steep fall-off in trade loans (offshore-onshore rate went negative, postRMB devaluation) but this was partially offset by Singapore property-related loan growth.
Market-related fees slowed, similar to peers
- Overall fee income fell 11% qoq, hurt by lower capital markets-related fee stream as IB (-40% qoq), WM (-22%), brokerage (-20%) waned; this was expected.
- Trading-related income was however, better-than-expected for this climate.
- Two big one-off swing items essentially offset: gains from HK property disposal was negated by a one-off accounting charge (-S$50m) from the first-time adoption of fair valuation adjustment (FVA) for derivatives i.e. trading would have stronger if not for accounting.
Negative jaws due to a variety of adjustment factors
- DBS resonating positive in recent quarters is NII growth. In 3Q where weak investment markets posed a drag, NII growth kept topline flat (+0.8% qoq).
- In the context of a flat topline, headline cost growth (+13.5% yoy) and 3Q cost ratio (46%) looked high, but this was recognisably inflated by:
- one-off FVA charge, and
- some remnant one-off M&A costs.
- Ex-these, total expense were +9% yoy and cost ratio stable at 45%.
Attention should focus on potential risky loan book exposure
- Like the market, our attention was focused on potential bad debt risks. DBS quantified its commodity exposure (7% of Group loans) and oil and gas exposure (8%), these overlapped though. Among its S$21bn commodity exposure, S$9bn is to producers, and S$12bn to traders. A large portion of loan exposure to producers is to the oil and gas sector, of which the exposure is largely to state-owned companies.
- On exposure to traders, a large portion is trade-related. We share more color in a subsequent section.
Maintain Add, roll forward target price now based on FY16 P/BV
- We roll forward to an end-16 target price (GGM, 1.16x FY16 P/BV). A year ago, DBS was viewed as the best interest rates play. A year on, the margin uptick has arrived, albeit modestly; but, prospects for significant rate hikes into 2016 has dimmed.
- Still, 3Q’s respectable 11.6% ROE was achieved amidst hollowing trade finance and shaky markets.
- Ahead, a better environment for capital markets, China’s trade flows will boost ROE and earnings. Higher provisioning explains why we are 10% below consensus.
Kenneth NG CFA
CIMB Securities
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Jessalynn CHEN
CIMB Securities
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http://research.itradecimb.com/
2015-11-02
CIMB Securities
SGX Stock
Analyst Report
19.58
Up
18.68
