DBS - RHB Invest 2016-05-04: Holding Up Well In Challenging Times

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DBS GROUP HOLDINGS LTD D05.SI 

DBS - Holding Up Well In Challenging Times

• DBS Group surprised with strong NIM improvement and smaller-than- expected fall in non-interest income in its 1Q16 results. 
• We expect DBS to deliver sustained core net profit in 2016 vs. projected 4-6% YoY declines for peers. 
• Benign rise in GILs, on resilient O&G exposures and receding pressure on CNY hedges, would help allay investor concern and provide catalyst for share price recovery ahead. 
• Reiterate BUY with revised TP of SGD17.30 (13% upside).

Outlook. 

• Management is relatively confident about DBS’ prospects. Rise in gross impaired loans (GILs) is expected to be benign as defaults in China trade hedges have likely troughed now that the CNY has stabilised while its oil and gas (O&G) exposures remain resilient. 
• A modest rise in specific provision (SP) credit cost, a pick-up in loan growth in 2H16, and net interest margin (NIM) uplift are key factors that prevent a drop in core net profit.

Forecasts and investment case. 

• We are leaving our forecasts unchanged, which points to sustained core earnings in 2016 followed by a 7.5% growth in 2017F. 
• Our GGM-derived TP is raised to SGD17.30 (from SGD16.70) as BVPS is raised by 3.7% on post-results adjustment of shareholders’ funds. 
• Our TP is based on 1.0x 2016F P/BV, which is near -1SD historical mean. 
• With the CNY having stabilised, we believe DBS’ Hong Kong-China GILs would likely trough in 2Q16. This coupled with resilience in its O&G book, in our view, would underpin share price recovery in the quarters ahead.

Key risks 

• Key risks that would impede stock from reaching our TP include sharper-than-expected rise in GILs and credit cost, weaker-than-expected NIM and softer- than-expected non-interest income.

1Q16 results highlights. 

• Core net profit (excluding one-time items) rose mainly on healthy net interest income growth supported by strong NIM uplift and lower impairment charges. 
• Positive surprises were smaller-than-expected fall in non- interest income and improvement in fully loaded common equity Tier 1 (CET1) ratio. 
• On the flipside, higher GILs were seen in Hong Kong, China and India.

Highlights From Management Briefing 

Asset quality resilient

• DBS’ non-performing assets (NPA) increased 9% QoQ to SGD3,048m with gross impaired loans (GIL) up 3% QoQ to SGD2,693m. Management explained that a third of new NPA formation of SGD600m during the quarter came from a steel company in India while another one third relates to CNY hedges in Hong Kong.
• There was no incremental GIL from the bank’s O&G exposures which was relatively unchanged from the SGD22.0bn reported in Dec 2016. DBS is not seeing an imminent signs of stress for its O&G exposures.

Non-interest income

• DBS’ non-interest income held up better than peers with a modest 2% YoY decline. This was helped by:
  1. higher fees from wealth management (+5% YoY) and cards (+12% YoY). DBS’ wealth management income was boosted by its bancassurance partnership with Manulife which added SGD27m (SGD1.6bn initial payment that is amortised equally every quarter over 15 years). This helped offset lower income from sale of unit trusts and treasury products; and
  2. a smaller 12% YoY decline in net trading income (lower customer treasury flows due to unfavourable market conditions) while net investment income was down 17% YoY.

Guidance on 2016 earnings drivers

1. Loans growth – In 1Q16, DBS’ loan book dipped 1% QoQ in constant-currency terms as the 11% QoQ decline in trade loans offset the 1% QoQ increase in non-trade loans (corporate borrowing and 2% QoQ growth in Singapore housing loans).
   Management is sticking with its guidance for 2-3% loan growth in constant-currency terms. Growth is expected to filter through in the second half of the year on deal-led lending and a c.SGD4.0bn increase in Singapore housing loans. DBS is gaining market share in the Singapore housing loan space with growth led mainly by refinancing. Management expects the bank’s China trade loans to fall by another SGD3-5bn in 2Q16 and stabilise thereafter;
2. NIM – NIM improved 16bps YoY (+1bps QoQ) to 1.85% in 1Q16 lifted by higher Singapore interest rates. Although short term rates have eased since mid-March 2016, management is confident NIM would average above the 1.77% seen in 2015.
   At current levels, Singapore interest rates are still higher than the same period a year ago. This would result in NIM uplift (on YoY basis) in 2Q16 and 3Q16, but margins should stabilise in 4Q16. Management expects NIM to average at 1.81-1.82% for the full year; and
3. Credit cost – Impairment charges fell 6% YoY in 1Q16 mainly because DBS did not make any general allowance in 1Q16 as there was no growth in its loan portfolio, while specific provisions (SP) declined 19% YoY. With GIL expected to be benign, management is comfortable with its guidance for SP credit cost of 25bps for 2016 (1Q16: 18bps annualised).

Singapore Research RHB Invest | http://www.rhbinvest.com.sg/ 2016-05-04

RHB Invest SGX Stock Analyst Report BUY Maintain BUY 17.30 Up 16.70