DBS Group Holdings (DBS SP) - 4Q16 Lightning Never Strikes Twice
- DBS’ 4Q16 results were slightly below expectations due to higher-than-expected specific provisions for the O&G sector. However, the worst could be over as management has guided for a moderation in NPL formation and credit costs in 2017.
- DBS also possesses the highest beta to rising US interest rates due to its strong deposit franchise in Singapore.
- Maintain BUY. Target price: S$21.50.
- DBS reported a net profit of S$913m for 4Q16 (-8.9% yoy), slightly below our expectation of S$983m.
Temporary dip in NIM.
- Loans grew 3.9% qoq (1% qoq on constant currency terms) driven by regional corporate loans and gains in market share for Singapore housing loans.
- NIM contracted 6bp qoq to 1.71%.
- Deposits expanded S$23b or 7.1% qoq, driven mainly by US dollar-denominated fixed deposits. The precautionary measure to hold surplus deposits pushed cost of deposits higher by 5bp qoq to 0.56%.
Fee income affected by seasonality.
- Fees expanded 6% yoy but contracted 16% qoq to S$515m. The sequential pullback from investment banking, loan-related fees and wealth management was due to seasonality.
- Management explained that high net worth clients stayed at the sidelines due to uncertainty post-US presidential election.
Robust net trading income.
- Net trading income increased 37% yoy to S$397m. Gains from investment securities were muted at S$25m.
Driving cost efficiency.
- Cost-to-income ratio (CIR) improved by 2.7ppt to 44.1% in 4Q16 due to productivity gains from efforts in digital banking and strategic cost reduction initiatives.
- IT-related expenses declined 23% yoy due to insourcing of technology functions while the increase in staff costs was capped at 3% yoy.
Credit costs stay elevated.
- Net increase in NPLs was S$537m or 13.8% qoq (S$486m or 90% from the transportation sector, ie O&G). NPL ratio deteriorated by 13bp qoq from 1.32% to 1.45%.
- Provisions were elevated at S$462m or at 61.7bp but loan loss coverage dipped to 96.7%.
Well capitalised with adequate buffer.
- DBS’ fully phased-in CET-1 CAR remains strong at 13.3%, the highest in the banking sector.
ESSENTIALS – HIGHLIGHTS FROM RESULTS BRIEFING
- Positive outlook for 2017: Management guided for mid-single-digit growth in loans and operating income in 2017.
- NIM is expected to improve to 1.80% (4Q16: 1.71%) while CIR should be kept at 43%. Management expects NIM expansion from Singapore and China.
- Management guided total provisions of S$1,000m for 2017 (2016: S$1,434m).
Moderation in NPL formation and credit costs for 2017.
- While the outlook remains challenging, deterioration from large corporates within the O&G sector appears to be behind DBS. Further deterioration from smaller companies within the space would be less damaging compared with the carnage in 2016. We expect credit costs to taper off to 37- 38bp in 2017-18 and to normalise to 29bp in 2019. In addition, firmer US interest rates would also be a positive catalyst for the banking sector.
- DBS declared a final dividend of 30 S cents/share, unchanged from 2015. Scrip dividend scheme is applicable for the final dividend.
- Our net profit forecasts for 2017 and 2018 remain largely unchanged.
- Maintain BUY. Our target price for DBS of S$21.50 is based on 1.19x 2017F P/B, which is derived from the Gordon Growth Model (ROE: 9.4%, COE: 8.0% (Beta: 1.05x) and Growth: 0.5%).
SHARE PRICE CATALYST
- DBS focuses on its nine strategic priorities to grow organically. Growth drivers include regional businesses such as global transaction services, wealth management and SMEs.
- Growth from overseas markets, such as China, Hong Kong, India, Indonesia and Taiwan, including initiatives in digital banking.