DBS Group Holdings - UOB Kay Hian 2016-11-01: 3Q16 Trims Costs While Maintaining Industry-Leading CET-1 CAR

DBS Group Holdings - UOB Kay Hian 2016-11-01: 3Q16 Trims Costs While Maintaining Industry-Leading CET-1 CAR DBS GROUP HOLDINGS LTD D05.SI

DBS Group Holdings - 3Q16 Trims Costs While Maintaining Industry-Leading CET-1 CAR

  • Good results with strong growth in fees, robust net trading income, improved cost efficiency and PPoP expanding 19.3% yoy. 
  • DBS recognised a lumpy O&G exposure in Singapore as NPL. However, bottom-line was above S$1b despite hefty credit costs at 59.9bp. 
  • Management expects NPL formation to moderate and cost efficiency to improve going forward. 
  • Maintain BUY. Target price: S$18.98.


RESULTS

  • DBS reported net profit of S$1,071m for 3Q16 (+0.5% yoy), above our forecast of S$993m and consensus estimate at S$1,042m.

Slight pick-up in loan growth offset by NIM compression. 

  • Loans expanded a healthy 1.9% qoq but grew only 1.8% yoy (only +0.5% ytd in 1H16). The expansion on a yoy basis was driven by Singapore (+4.7% yoy) and South & Southeast Asia (+4.5% yoy). On a sequential basis, loans extended to customers in Greater China expanded S$5.3b or 14.6% qoq due to non-trade corporate loans.
  • NIM slipped 10bp qoq to 1.77% due to the steep correction in SIBOR/SOR and setting aside of extra US$ liquidity to guard against adverse impact from the US money market reform.

Robust non-interest income. 

  • Fees grew a strong 18.8% yoy (2Q16: +7.9% yoy) driven by wealth management and cards. Net trading income was robust at S$338m.

Benefitting from cost efficiency. 

  • A turn to more stringent cost control was evident as operating expenses declined by 4.8% yoy (2Q16: +5.5% yoy). Occupancy, IT and other expenses declined by 4.8%, 7.1% and 12.4% yoy respectively.

Recognising vulnerable O&G exposures as NPLs. 

  • NPL balance increased by a hefty S$620m or 19% qoq as DBS recognised a lumpy Oil & Gas (O&G) service exposure in Singapore as NPL. New NPLs was elevated at S$1,055m while write-offs were substantial at S$491m (Swiber: About S$200m). NPL ratio deteriorated from 1.13% to 1.32% while loanloss coverage dipped further from 112.9% to 100.2%.

Credit costs were steep at 59.9bp. 

  • Specific provisions were a significant S$220m.
  • Management was prudent to set aside general provisions of S$169m.


ESSENTIALS – HIGHLIGHTS FROM RESULTS BRIEFING

  • Hopeful that further deterioration in asset quality would be mild. Asset quality continues to be under pressure. Management see outlook for upstream exploration activities to be challenging. Demand for vessels deployed in the production phase is still holding up, although capacity utilisation is low at 60%.
  • For smaller O&G companies, DBS has exposure of S$2.7b to 90 companies. The proportion of companies exhibiting weakness has increased from one-third to half. Some customers suffered spillover effects from Swiber while others face difficulties in accessing financing from capital markets.
  • 40% of the refinancing are completed or substantially completed as these companies have strong underlying cash flows and relatively young fleet/vessels. Discussion and negotiation for refinancing for the remaining 60% are underway.
  • Management expects NPL formation to be more “granular” (smaller) going forward. It expects losses from the O&G sector to be modest as loans are backed by collaterals.
  • Management expects NPL ratio to peak at 1.5% during the current credit cycle.
  • Acquiring ANZ’s wealth and retail businesses. DBS has entered into an agreement to acquire ANZ’s wealth management and retail banking businesses across five markets, namely Singapore, Indonesia, Hong Kong, Taiwan and China, at S$110m above book value.
  • The acquisition provides deposits of S$17b, loans of S$11b and wealth AUM of S$23b (mainly Singapore and Hong Kong), bringing DBS’s total wealth AUM to S$182b (up 14.5%).
  • They serve 1.3m customers, comprising 100,000 affluent/private wealth customers and 1.2m retail customers. The acquisition expands DBS’ customer base in Indonesia by 6x and in Taiwan by 2.5x.
  • Valuation of the acquisition is attractive at P/AUM of 0.5% (compared with P/AUM of 1.75% paid for previous acquisition of private banking business of Societe Generale in Singapore and Hong Kong), assuming the retail banking businesses are acquired at book value. The lower valuation is probably due to the higher proportion (two-thirds) of mass affluent wealth customers.
  • The transaction is expected to be ROE- and earnings-accretive one year after completion.
  • Completion would take place progressively over the next 15 months. Management estimated earnings contribution of S$200m within three years.


STOCK IMPACT


Aim for growth in 2017. 

  • Management guided for mid single-digit loan growth for 2017. It aims to maintain flat jaws, ie growing income in tandem with expenses at single-digit rate. It expects provisions for the O&G sector to taper off and credit costs to be about 30bp next year.

Good results for 3Q16. 

  • We view 3Q16 results positively due to strong growth in PPOP at 19.3% yoy. Bottom-line was above S$1b despite higher credit costs. Fully phased-in CET-1 CAR was 13.5%, the highest among peers.


EARNINGS REVISION/RISK

  • We raised our 2016 net profit forecast by 2.5% due to the better results in 3Q16 and for 2017 by 2% due to improved cost efficiency.


VALUATION/RECOMMENDATION


Maintain BUY. 

  • We roll forward our valuation to 2017. 
  • Our target price for DBS of S$18.98 is based on 1.05x 2016F P/B, which is derived from the Gordon Growth Model (ROE: 9.2%, COE: 8.75% (Beta: 1.25x) and Growth: 0%).


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, Hong Kong, India, Indonesia and Taiwan, including initiatives in digital banking.




Jonathan Koh CFA UOB Kay Hian | http://research.uobkayhian.com/ 2016-11-01
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 18.98 Up 17.800




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