DBS Group (DBS SP) - Proactive steps
TP/EPS raised on higher loan growth assumption
- DBS’s FY16 core PATMI was in-line with our expectations. FY16 pre-provision profits grew 10% YoY, which also underlies its ability to grow revenues and cut costs amid worsening asset quality.
- We raise FY17-18E earnings estimates by 10-11% to reflect mainly a higher loan growth assumption of 4% (from 2%). We also introduce FY19 estimates.
- Challenge would be maintaining/growing market share amid rising competition.
- Our TP is raised c.16% to SGD18.13 based on ~1.0x FY17E P/BV (from ~0.9x previously). Despite revisions, we maintain HOLD and await signs of a bottom in asset quality deterioration and/or rising rates.
NIM upside limited if rates stay low
- DBS is sensitive to repricing interval as ~60% of its SGD loan book is priced in SIBOR/SOR. With lower SGD rates, 4Q16 customer spreads declined to 2% (3Q16: 2.03%). FY16 loans growth at 6% YoY was better than our expectation.
- Market share for Singapore housing loans improved to 29% from 28% in 3Q16. We think there may be some compression in loan yields given the increased appetite to gain market share.
- Similar to OCBC (OCBC, SELL, TP SGD8.05), DBS expects FY17 NIM to remain stable despite the positive outlook on Fed rate hikes.
Provisions likely to stay elevated
- 4Q shows some proactive steps that the bank is taking in recognizing new O&G accounts as NPAs and taking in more specific provisions.
- While the pace of acceleration in provisions for O&G may be slower in 2017, we think provisions are likely to remain elevated as the woes in O&G support services sector are not over.
TP raised c.16% to SGD18.13
- With net profits revised upwards by 10-11% for FY17-18E, we raise our TP c.16% to SGD18.13, based on ~1.0x FY17E P/BV (from 0.9x FY17E P/BV) on lower ROEs.
- With the change in EPS, our assumed sustainable ROE is now 10.4% (9.6% previously), COE of 10.5% and growth rate of 3.5%.
- Risks to our call are:
- NIM improvement from higher rates;
- higher non-interest income; and
- lower provisions.
- 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.
- 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.