DBS GROUP - Single-Digit Growth
- Higher allowances in 4Q.
- Guiding for single-digit growth.
- Maintain HOLD.
4Q16 came in below expectations
- DBS Group Hldgs Ltd posted a 9% YoY or 15% QoQ drop in 4Q16 net earnings to S$913m, versus consensus of S$1,014m based on a Bloomberg poll. This led to a 5% drop in FY2016 earnings to S$4238m.
- This was mainly due to a sharp rise in provisions which rose 87% YoY or 6% QoQ to S$462m (full year of S$1434m versus S$743m in FY15).
- Net Interest Margin (NIM) eased off from 1.84% in 4Q15 and 1.77% in 3Q16 to 1.71% in 4Q16.
- NPL rose from 0.9% in 4Q15 and 1.3% in 3Q16 to 1.4% in 4Q16.
- Final dividend of 30 cents was declared, bringing full year to 60 cents (unchanged).
O&G support services remain challenging
- The outlook for the oil and gas sector remains challenging despite oil price staging a rebound from 2016 low. Of the S$7b exposure to the sector, about S$1.8b is to state-owned/ government-linked shipyards.
- From the balance of S$5.5b, a few names have moved to NPA, but management believes that sufficient provisions have been made.
- In addition, the recent divestment gains of S$350m from the sales of PWC Building will be set aside as general provisions (GP), increasing GP to S$3.52b.
- The group has also recovered about S$50m from Swiber .
Increase FV to S$18.99; maintain HOLD
- Management continues to look into its cost structure and deploying resources to technology-related area.
- It is also keen to explore tie-ups in Fintech, but shared that it is unlikely to look at major M&A this year as it integrates ANZ into its operation in 2017/18.
- It is also guiding for single-digit loans and income growth for 2017 and expects new NPA formation and specific provisions to be lower than in 2016.
- Overall, the worst in terms of the oil and gas sector appears to be over, although the outlook is still dismal.
- We have rolled our valuations into FY17 and using the improved P/B of 1.05 due to recent re-rating of the banking sector, our fair value estimate increases from S$17.83 to S$18.99.
- As the upside is less than 10%, we are maintaining our HOLD rating, but will turn buyers at $17.80 or lower.