DBS Group Holdings (DBS SP) - 1Q17 Results Preview: Stabilisation In Asset Quality, Moderation In Credit Costs
- DBS’ 1Q17 performance is likely to be characterised by sequential NIM expansion with the recent up-tick in SIBOR and SOR as well as the recovery in contributions from wealth management on market sentiment improvement.
- We expect NPL formation and credit costs to have moderated as the larger, vulnerable oil & gas accounts had already been recognised as NPLs.
- Maintain BUY. Target price: S$21.50.
Exchange rate negatively affects loan growth.
- We expect DBS to have generated positive underlying loan growth on a sequential basis in 1Q17. However, the US dollar (33.4% of total loans) and Hong Kong dollar (11.7% of total loans) have weakened by 3.7% against the Singapore dollar, which may drag overall loan growth into negative territory. This would be compensated by NIM expansion of 6bp qoq to 1.77% due to the recent pick-up in SIBOR and SOR.
Wealth management has recovered.
- We expect fee income to increase by a healthy 5.4% yoy to S$605m. Contributions from wealth management have recovered with the buoyant market sentiment. We expect net trading income of S$200m, which is usually seasonally strong in the first quarter.
On track to enhance cost efficiency.
- Management intends to leverage on digital banking to improve cost efficiency. We expect operating expenses to be flat on a yoy basis and cost-to-income ratio to be maintained at 43.7%.
Moderation in credit costs.
- Management has previously guided that NPL formation and total provisions would be lower in 2017. We forecast total provisions of S$293m in 1Q17, which is significantly lower than S$462m in 4Q16.
- NPL formation has tapered off as DBS has already recognised the larger vulnerable oil & gas accounts as NPLs. Loan loss coverage has recovered back to above 100%.
Strong sequential recovery.
- We forecast net profit of S$1,052m, up 15.2% qoq but down 12.6% yoy (1Q16 is a high base driven by commencement of bancassurance deal from ManuLife and net trading income of S$315m).
- The one-off gain of $350m from the divestment of PwC Building would be recognised as an exceptional item below the line.
Scaling back accommodation.
- FED chair Janet Yellen said that the era of ultrasimulative monetary policy is coming to an end. The FED has switched from its focus of reviving a recession-scarred economy to maintaining the growth momentum achieved over the past few years. She also said gradual hikes in interest rates is appropriate.
- President of New York FED William Dudley even suggested reducing the size of the FED’s balance sheet later this year, although this is not expected to be disruptive.
Biggest beneficiary of interest rate upcycle.
- DBS has an overwhelming competitive advantage in Singapore dollar-denominated loans, which accounted for 40.5% of total loans, due to its Singapore dollar-CASA ratio at 89.5% (savings accounts: 71.5%, current accounts: 18%). DBS’s market share for Singapore dollar- denominated savings accounts has been stable at 52%. It does not need to chase for high-cost fixed deposits, which accounted for a smaller 10.4% of its total deposits in Singapore dollars.
- DBS has the lowest cost of deposits at 0.56% (OCBC: 1.04%, UOB: 1.12%). We expect NIM to expand by 10bp yoy to 1.81% in 4Q17 after factoring in three hikes in US interest rates in 2017.
- We maintained our existing earnings forecast.
- 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
- Rising interest rates and bond yields.
- Easing of pressure on asset quality from the O&G sector.