DBS - Stabilising Asset Quality, Positives In The Share Price
- DBS’ results are in line with our estimates.
- On the back of the challenging economic environment, we project a higher 1.6% NPL ratio by end-2017. With the 1Q17 one-time gain, the bank has beefed up its general provisions to 1.2% of loans – a positive. However, a slight negative is the QoQ loans contraction.
- Maintain NEUTRAL, with TP raised marginally to SGD20.50 (from SGD19.80, 6% upside) pegged to FY17F P/BV of 1.1x, which assumes a long term ROE of 10.2%.
- We see a limited share price upside from here as DBS is trading close to its historical P/BV.
We forecast NPL ratio to rise to 1.6% by end-2017, from 1.4% in 1Q17.
- Whilst stress from the oil & gas sector has somewhat abated, the risk remains if crude oil price stays weak. A challenging economic environment could also pull up the NPL ratio.
Divestment gains set aside as general provisions.
- Its 1Q17 credit cost (specific loan allowances) of 26bps is half of 4Q16’s 57bps but 8bps higher YoY. 1Q17’s loan loss coverage rose to 103%, from 4Q16’s 97%.
- There was a SGD350m gain from the divestment of the PwC Building in Singapore – this amount has been set aside as general allowances, thereby raising the general allowance reserves to SGD3.49bn.
- Management guided for SGD1bn of provisions for 2017, of which SGD200m was recorded in 1Q17. Excluding the SGD350m general allowances in 1Q17, our 2017 provisions expectation is SGD1.04bn.
Management guided 2017 NIM to be close to its 2016 average.
- 1Q17’s NIM of 1.74% was 3bps wider QoQ, due to higher interest rates in HK & Singapore. We believe the impending US Federal Reserve rate hikes would widen its NIM to 1.79% in 2017 (vs 2016’s 1.80%).
- Management indicated that 2017’s NIM could be closer to 1.77-1.78% if there is only one more US Fed rate hike this year. 1Q17’s loan was 1% lower QoQ, with contractions seen in manufacturing and building & construction segments. However, DBS has gained Singapore’s mortgage loan share over the past two years.
- We project its 2017 loan growth of 4%, and NII expansion of 2%.
Results in line.
- 1Q17’s net profit was SGD1,245m. Excluding the one-time items, recurrent net profit of SGD1,210m was 1% higher YoY, representing 27% & 26% of ours and consensus’ pre-results 2017F net profit of SGD4,447m & SGD4,602m respectively.
- We raise our FY17F net profit by a marginal 1%. We introduce our FY19F earnings in this report and factor in a single-digit FY19F net profit expansion on the back of stronger revenue.
- Our GGM-derived TP of SGD20.50 comes after:
- Factoring in 9.5% CoE and 10.2% ROE (2016 ROE was 10.1%);
- Implying 1.1x 2017F P/BV (which is close to historical average of 1.07x).
- The downside risks to our forecast include higher-than-expected impairment charges and weaker-than-expected NIMs.
- The converse represents the upside risks.