DBS Group Holdings (DBS SP) - 4Q16 Results Preview ~ Lumpy O&G Exposure Already Recognised As NPLs
- We expect DBS to report a decent net profit of S$983m for 4Q16, receding 8% qoq but relatively flat yoy.
- DBS is the prime beneficiary of higher Singapore and US interest rates. It is expected to generate a resilient growth of 7.1% for PPoP in 2016.
- The stock provides a dividend yield of 3.2%. Maintain BUY. Target price: S$21.20.
- We expect DBS Group Holdings (DBS) to report a decent set of 4Q16 results on 16 February.
4Q16 results preview.
- We expect DBS’ underlying loan growth in 4Q16 to maintain at a moderate pace of 1% qoq and 3% yoy, driven by housing loans in Singapore and corporate loans across the region.
- Net interest margin (NIM) is expected to have slipped a couple of bp on a sequential basis from 1.77% in 3Q16 due to the lag effect from the sharp pullback in SIBOR and SOR (positive impact from the rebound post-US presidential election would be felt in 1H17).
- We expect fees to have been seasonally softer in 4Q16, especially from market-sensitive sources such as stockbroking and investment banking. However, due to a low base, we expect a 20% yoy growth in fees in 4Q16, driven by wealth management and credit cards.
- Net trading income and gains from investment securities were also expected to have been seasonally weaker.
Weathering headwinds from asset quality.
- DBS continues to see new NPLs from the oil & gas (O&G) sector and provisions remain elevated. We expect NPL balance to have increased by S$400m, or 10% qoq, and NPL ratio to have deteriorated slightly by 11bp qoq from 1.32% to 1.43%. We expect DBS to make total provisions of S$292m, or 39bp, in 4Q16.
- DBS is likely to have already recognised Ezra as NPL in 3Q16 when the net increase in NPLs was fairly large at S$620m, up 19% qoq, and total provisions were hefty at S$436m (specific provisions: S$220m, general provisions: S$169m), or 60bp. We believe DBS has exposure of S$500m-600m to Ezra, of which about 90% is collateralised and the resultant impact on provisions should be manageable.
A decent quarter.
- We forecast a net profit of S$983m for 4Q16, receding 8% qoq but relatively flat yoy.
- Fundamentals continue to be anchored by its strong deposit franchise for the Singapore dollar, which makes it the prime beneficiary of rising US and Singapore interest rates (high correlation between US and Singapore interest rates).
- Growth in pre-provision operating profit (PPoP) is expected to be robust at 7.1% for 2016F.
Proxy to rising US interest rates.
- According to Fed chairwoman Janet Yellen, FOMC members projected the US Fed funds rate would increase to 1.4% by end-17 (currently 0.75%), indicating expectations of three hikes within 2017 instead of two previously. UOB Global Economics & Markets Research forecasts the Fed funds rate to reach 1.50% by end-17.
- In Singapore, the 3-month SIBOR and SOR have bottomed in Oct 16 and rebounded by 9bp and 21bp to 0.96% and 0.83% currently respectively. UOB Global Economics & Markets Research forecasts the 3-month SIBOR to reach 1.35% by end-17. We estimate DBS’ NIM would expand by 4bp from 1.76% in 4Q16 to 1.80% in 4Q17.
Bulking up in wealth management.
- DBS has improved its ranking from the eighth to the fifth largest private bank in the Asia Pacific region, according to a study by Private Banker International.
- DBS' wealth management franchise has expanded organically and through the acquisition of Society Generale Private Banking Asia.
- DBS has AUM of S$151b, of which high net worth clients (investable assets of S$1.5m or more) account for S$104b. The acquisition of ANZ’s wealth management business (mainly Singapore and Hong Kong) would further add another S$23b to DBS’ AUM.
- DBS differentiates itself through iWealth, its all-in-one online platform to:
- conduct banking transactions,
- gain research insights and analysis, and
- manage and trade portfolio of stocks and funds.
- It plans to launch its mobile platform in early-17.
- We maintain our earnings forecasts.
- Maintain BUY.
- Our target price of S$21.20 is based on 1.17x 2017F P/B, derived from the Gordon Growth Model (ROE: 9.3%, COE: 8.0% (Beta: 1.1x) and Growth: 0.5%).
SHARE PRICE CATALYST
- Rising interest rates and bond yields.
- Easing of pressure on asset quality from the O&G sector.