DBS Group (DBS SP) - Maybank Kim Eng 2017-02-17: Proactive steps

DBS Group (DBS SP) - Maybank Kim Eng 2017-02-17: Proactive steps DBS GROUP HOLDINGS LTD D05.SI

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: 
    1. NIM improvement from higher rates; 
    2. higher non-interest income; and 
    3. lower provisions.


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/ 2017-02-17
Maybank Kim Eng SGX Stock Analyst Report HOLD Maintain HOLD 18.13 Up 15.680



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