DBS Group Holdings - UOB Kay Hian 2016-05-04: 1Q16 Non-Interest Income Exceeds Expectations

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DBS GROUP HOLDINGS LTD D05.SI 

DBS Group Holdings (DBS SP) 1Q16: Non-Interest Income Exceeds Expectations

• 1Q16 results exceeded expectations. 
• The bancassurance partnership with ManuLife boosted fees from wealth management while net trading income remained robust. 
• There was no deterioration in asset quality from the O&G sector. 
• DBS suffers from contraction in trade loans in 1H16 but corporate loans should pick up in 2H16. 
• Valuation is attractive with P/B at 0.9x and dividend yield at 3.9%. 
• Maintain BUY. Target price: S$19.22.

RESULTS

• DBS reported net profit of S$1,203m (-5.2% yoy, +20.1% qoq), above our forecast of S$1,003m and consensus estimate of S$1,015m.
• Contraction due to forex and trade loans. Loans contracted 3.2% qoq and 2.4% yoy in 1Q16. US$ loans and HK$ loans contracted 6.1% and 4.9% qoq respectively due to strength of the S$ against US$ and HK$. Trade loans contracted S$6b or 15% qoq. Net interest income grew 8.5% yoy due to NIM expansion of 1bp qoq and 13bp yoy.
• Strength from non-interest income. Fees grew 2.5% yoy. Contribution from wealth management expanded 5.4% yoy boosted by bancassurance partnership with ManuLife. Contribution from credit & debit cards also increased 11.8% yoy. Contribution from cash management has surpassed that from trade finance.
• Net trading income was a robust S$315m with healthy flows from treasury customers.
• Exerting discipline on expenses. Operating expenses increased 7.1% yoy and
• cost/income ratio was healthy at 44.2%. Growth in operating expenses has decelerated compared with a 10.3% yoy increase in 4Q15.
• No deterioration from O&G. NPL ratio edged up slightly by 0.1ppt to 1.0%. NPLs increased by S$81m or 3.1% qoq, mainly attributed to Hong Kong. Specific provisions declined 18.5% yoy to S$123m. Management did not set aside any general provisions as cumulative general provisions were a healthy S$3.2b.
• Most well capitalised. DBS’ fully loaded CET-1 CAR of 13.2% was a 0.8ppt qoq improvement, and was the highest among the three Singapore banks.

ESSENTIALS – HIGHLIGHTS FROM RESULTS BRIEFING

• Anticipates stronger loan growth in 2H16. 

• Management maintained its guidance that loan growth would by 2-3% in constant currency terms for 2016. 
• Loan growth is expected to suffer from contraction in China-related trades loans in 1H16. Pipeline for corporate loans is robust. 
• Management expects a pick-up in corporate loans in 2H16 due to: 
  1. corporate activities, such as M&As and privatisations, and 
  2. growth in Indonesia and India.
• Trade loans contracted S$6b or 15% qoq (S$5b or 11% qoq in constant currency terms) in 1Q16. China-related trade loans have fallen to just S$12b, accounting for about one- third of all trade loans. Management expects trade loans to contract by another S$3b-5b qoq in 2Q16 and stabilise thereafter.

• NIM to moderate in 2Q16. 

• NIM for 2016 is expected to be higher at 1.81-1.82% compared with 1.77% achieved in 2015. NIM is expected to moderate qoq due to lower SIBOR and SOR in 2Q16. Management expects NIM to be higher on a yoy basis till 3Q16 and flat yoy in 4Q16.

• Maiden contribution from bancassurance partnership with ManuLife. 

• Fees from bancassurance increased by 44% yoy to S$98m. The bancassurance partnership with ManuLife contributed income of S$40m in 1Q16, comprising accrual of upfront fee of S$27m and variable performance fee of S$13m. Wealth management AUM expanded by 5% yoy to S$147m. Growth from bancassurance compensated for the drop in sales for unit trusts and other investment products.

• New NPLs from manufacturing and general commerce. 

• The bulk of new NPLs were from a steel company in India and renminbi hedging contracts for a Hong Kong corporate. There were no new NPLs from the O&G sector. Exposure to the O&G sector was relatively unchanged. Loans extended to the Offshore Support Services were reduced by S$600m-700m qoq. On the other hand, DBS extended more loans to Producers. Management does not see any imminent weakness from exposure to the O&G sector.
• Management expects NPL ratio to peak at 1.3%. Guidance for specific provisions is kept unchanged at 25bp for 2016.

• Not too adversely affected by Basel 3.5. 

• Management anticipates that Standardised Approach for measuring Counter-party Credit Risk (SA-CCR) would be implemented in 2017 and Fundamental Review of the Trading Book (FRTB) in 2019. Management expects risk-weighted assets to increase by 10% and CET-1 CAR to be reduced by 0.8- 0.9ppt due to Basel 3.5.
• DBS utilises internal models only for determining probability of default (POD). It does not use internal models for Loss Given Default (LGD) and Exposure At Default (EAD). It has a conservative risk density and would be less affected by Basel 3.5 than European and American banks.

• Efforts in digital banking. 

• DBS has launched a new mobile-only bank in India in April. It also harnesses the power of IT to increase revenue and improve cost efficiency. Such efforts include increasing the sale of bancassurance products and provision of remittance services through online channels and a 15% yoy reduction in volume of calls to its call centres.

STOCK IMPACT

• DBS’ 1Q16 results exceeded expectations due to strength in non-interest income from wealth management fees and net trading income.
• Valuation is attractive with P/B at 0.9x and dividend yield at 3.9%.

EARNINGS REVISION/RISK

• We have increased our net profit forecast for 2016 by 3.9% after factoring in the stronger set of numbers for 1Q16. 
• We have reduced our net profit forecast for 2017 by 1.7% after lowering assumption for NIM from 1.85% to 1.82%. 
• We are reluctant to build in expectations of further NIM expansion, as timing of upcoming hikes in US interest rates is highly uncertain.

VALUATION/RECOMMENDATION

• Maintain BUY. 
• Our target price for DBS of S$19.22 is based on 1.13x P/B, which is derived from the Gordon Growth Model (ROE: 9.3%, COE: 8.3% (Beta: 1.1x) and Growth: 0.8%).

SHARE PRICE CATALYST

• DBS focuses on its nine strategic priorities to grow organically. Growth drivers include regional businesses such as global transaction service, wealth management and SMEs.
• Growth from overseas markets,such as China,HongKong,India,Indonesia and Taiwan.

Jonathan Koh CFA UOB Kay Hian | http://research.uobkayhian.com/ 2016-05-04

UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 19.22 Down 19.25