DBS Group - Maybank Kim Eng 2016-11-01: Negatives price in; U/G HOLD

DBS Group (DBS SP) - Maybank Kim Eng 2016-11-01: Negatives price in; U/G HOLD DBS GROUP HOLDINGS LTD D05.SI

DBS Group (DBS SP) - Negatives price in; U/G HOLD



    TP and EPS est.’s lifted 

    • 9M16 core PATMI of SGD3.3b beat on higher non-interest income and lower costs, but provisions were higher than our expectations. 
    • 3Q16 core PATMI was flat YoY. Key factors were: 
      1. flat YoY growth in net interest income from lower SGD interest rates and higher liquidity buffers; and 
      2. higher provisions (> 100% YoY). 
    • It also announced a small bolt-on acquisition of ANZ’s wealth management and retail business, which is not expected to have material impact on capital. 
    • We raise FY16-18E earnings estimates by c.1% each to reflect higher non-interest income and lower costs, offset by higher provisions. 
    • Our TP is raised 2% to SGD14.55 based on ~0.8x FY17E P/BV. We think the negatives are largely priced in. 
    • U/G to HOLD.


    Asset quality worsen, but better cost management 

    • Group NPLs rose to 1.3% (2Q16: 1.1%). NPAs increased 12% QoQ as an O&G name (~SGD460m) was moved to NPA during the quarter. This was offset by SGD491m of write-offs, of which ~40% were attributed to Swiber. 
    • Provision coverage fell to 100% (2Q16: 113%). Aside from O&G, commodities (e.g. steel and coal) and SMEs could be facing some stress. With that, we raised FY16-18E provisions by 5-15% and credit costs from 39-44bps to 45-49bps. 
    • The key differentiator in 3Q was lower costs, as cost-income ratio (CIR) was reduced significantly to 41% (2Q16: 46%). Management attributed it to strategic cost management and enhanced productivity from digitalization, and expects FY16E CIR to be 43-44%. We lowered our cost assumptions slightly by 1% for FY16-17E.


    Lower customer spreads 

    • As DBS is sensitive to re-pricing interval, NIM compressed 10bps QoQ to 1.77% from lower SGD rates. Similar to peers, customer spreads declined to 2.03% (2Q16: 2.10%), despite a heightened risk environment. 
    • We expect stable NIM for DBS at 1.77%-1.78% for FY16-17E. To compete on loans growth, we think Singapore banks may face pricing pressure to accept lower spreads.


    TP raised to SGD14.55 

    • TP is revised up to SGD14.55 based on ~0.8x FY17E P/BV, which is close to 1.5SD below the historical mean to reflect our lower forecast ROE compared to prior periods. 
    • Risks to our call are: 
      1. NIM recovery; 
      2. higher non-interest income; and 
      3. benign credit costs.


    Swing Factors


    Upside

    • Ability to reprice loans at higher interest rates and lower costs of funding, from large pool of CASA deposits.
    • Higher non-interest income from wealth-management and Manulife bancassurance businesses.
    • Sharp and sustained rebound in commodity prices.
    • Asset quality better than expected with no major credit slippages and proactive loan restructuring.
    • Higher demand for domestic mortgages from easing of cooling measures.
    • Translation benefits from appreciation of USD/HKD.

    Downside

    • Highest asset-quality risks from exposure to North and South Asia and O&G sector.
    • Sharp decline in the value of securities and shocks in fixed-income portfolio.
    • Job losses in Singapore become pervasive, hurting mortgage portfolio.
    • Lack of liquidity of a funding currency.
    • Emergence of dominant financial competitor in Singapore.
    • Capital-raising by peers.




    Ng Li Hiang Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-11-01
    Maybank Kim Eng SGX Stock Analyst Report HOLD Upgrade SELL 14.55 Same 14.300




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