DBS Group Holdings (DBS SP) - UOB Kay Hian 2017-05-03: 1Q17 NPL Formation And Specific Provisions Have Eased Sequentially

DBS Group Holdings (DBS SP) - UOB Kay Hian 2017-05-03: 1Q17 NPL Formation And Specific Provisions Have Eased Sequentially DBS GROUP HOLDINGS LTD D05.SI

DBS Group Holdings (DBS SP) - 1Q17 NPL Formation And Specific Provisions Have Eased Sequentially

  • DBS achieved record core earnings of S$1,210m with strong growth in fee income of 15.9% yoy and reduction in operating expenses of 0.6% yoy. 
  • NPL formation and specific provisions have peaked and uncertainties from exposure to the oil & gas sector have diminished. 
  • DBS has a track record of consistency in execution and delivering good results. 
  • Maintain BUY. Target price: S$23.30.



RESULTS

  • DBS reported underlying net profit S$1,210m (+1% yoy) for 1Q17, above our expectation of S$1,052m. 
  • There were one-off items totalling S$35m (gains from divestment of PwC Building of S$350m were utilised to beef up general provisions, integration costs for ANZ retail and wealth management operations: -S$10m, tax on one-off items: S$45m). Including one-off items, net profit would be S$1,245m.

Turnaround in NIM. 

  • Loans contracted 0.8% qoq as USD (33.2% of total loans) and HKD (11.1%) weakened by 3.7% against the Singapore dollar. Corporate loans contracted 3% qoq due to lumpy repayments while trade loans expanded 8% qoq due to recovery in intra-regional trade. 
  • NIM expanded 3bp qoq to 1.74% due to improvement in asset yield.

Strong sequential recovery from wealth management. 

  • Fees expanded 15.9% yoy and 29% qoq, boosted by transaction services (+11% yoy, +6% qoq) and wealth management (+26% yoy, +41% qoq). 
  • Net trading income was soft at S$270m, 14% lower yoy compared with S$315m clocked last year.

Improved cost efficiency. 

  • Operating expenses were reduced by 0.6% yoy, reaping the rewards from previous investments in digitalisation and efforts in cost management.
  • Cost/income ratio of 43.2% was in line with management guidance.

Easing of pressure on asset quality. 

  • New NPLs have eased from S$779m in 4Q16 to S$523m in 1Q17. 
  • NPL balance decreased 1.2% qoq as DBS disposed S$170m of NPLs in India to an asset restructuring company. 
  • NPL ratio eased marginally by 1bp qoq to 1.44%. 
  • Specific provisions were S$198m, a significant decrease of 57% qoq. 
  • DBS has utilised gain of S$350m from divestment of PwC Building to beef up general provisions. Thus, loan-loss coverage recovered by 6.3ppt to 103.2%.

To conduct review of dividend policy. 

  • DBS’ fully phased-in CET-1 CAR improved 0.9ppt qoq to 14.2%, significantly above minimum requirement of 9%. Management is comfortable with CET-1 CAR of 12.5-13.5%. 
  • The implementation for Basel 4 is likely to be delayed. Thus, management has decided to review DBS’ dividend policy for 2017.


ESSENTIALS – HIGHLIGHTS FROM RESULTS BRIEFING 


Outlook for 2017. 

  • Management has guided mid-single digit growth in loans and operating income for 2017. NIM is expected to improve to 1.80% (1Q17: 1.74%), assuming the two anticipated US interest rate hikes materialises in subsequent quarters, while cost-to-income ratio (CIR) should hold at 43%. 
  • Management guided total provisions of S$1.0b-1.1b (2016: S$1.4b).
  • Management expects loan growth from: a) customers in Singapore and China expanding overseas, including project financing and M&A deals. 
  • Management see growth potential from infrastructure projects, b) Management also sees pick-up in SME loans, and c) new loans of S$5b-6b from its consumer business.

Margin expansion from Hong Kong. 

  • NIM expanded by 3bp qoq. Management attributed 2bp of the improvement to its Hong Kong operations. HKD CASA ratio has improved from 33.3% to 52.2% over the past two years due to its strengthened cash management and wealth management businesses. Thus, DBS HK’s NIM expanded 15bp qoq to 1.79%, benefitting from the rise in HIBOR.

No chunky new NPLs. 

  • DBS has aggregate exposure to 90 smaller O&G accounts of S$2.9b. About half of these companies are vulnerable, some of which may slide to become new NPLs. Three of these companies were classified as NPLs in 1Q17 and they accounted for S$300m-400m of new NPLs. 
  • The impact on asset quality from further deterioration of this portfolio should be manageable. There is also uncertainty relating to valuation of collaterals for 2-3 specialised vessels (non-standard), should the need arise to dispose them.


STOCK IMPACT


Scaling new heights despite challenging operating environment. 

  • DBS’ core earnings of S$1,210m was a record high. Its fee income of S$665m was also a record high. 
  • NPL formation and specific provisions peaked and have eased on a sequential basis. Investors should be gratified that NIM has expanded in both Singapore and Hong Kong.


EARNINGS REVISION/RISK

  • We have raised our net profit forecast for 2017 by 6.9% and 2018 by 8.2% due to strong growth in fees and moderation in NPL formation and credit costs.


VALUATION/RECOMMENDATION

  • Maintain BUY. 
  • Our target price of S$23.30 is based on 1.25x 2017F P/B, derived from the Gordon Growth Model (ROE: 9.9% (previous: 9.4%), COE: 8.0% (Beta: 1.1x) and Growth: 0.5%).


SHARE PRICE CATALYST

  • NIM expansion from higher interest rates in Singapore and Hong Kong.
  • Improvement in cost/income ratio.
  • Growth from overseas markets, such as China, Hong Kong, India, Indonesia and Taiwan, including initiatives in digital banking.




Jonathan Koh CFA UOB Kay Hian | http://research.uobkayhian.com/ 2017-05-03
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 23.500 Up 21.500



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