DBS Group (DBS SP) - Maybank Kim Eng 2017-05-03: Positive Signs

DBS Group (DBS SP) - Maybank Kim Eng 2017-05-03: Positive Signs DBS GROUP HOLDINGS LTD D05.SI

DBS Group (DBS SP) - Positive Signs


A good start; EPS and TP raised 

  • 1Q17 core PATMI of SGD1.2b (+31% QoQ, -0.2% YoY) was in-line with our expectations. However, we see some positive signs in the results and have revised our estimates accordingly. 
  • We raised FY17-19 net profit by 2-5% mainly as we: 
    1. raised net interest income (NII) by 1-2% factoring in a higher loan growth assumption of 5-6% (from 4%); and 
    2. raised nonII by 1-3% mainly from higher wealth management (WM) fees. 
  • We largely retain our FY17-19 provision estimates which we think are likely to stay elevated. Our TP is raised by 6% to SGD19.18 based on ~1.1x FY17E P/BV (vs 1.0x previously). 
  • Maintain HOLD.


NII flat; Non-II provided support; provisions elevated 

  • Despite healthy loans growth at 7% YoY in constant currency terms, NII was flat QoQ/YoY, and customer spreads fell slightly to 1.99% (4Q16: 2%).
  • We believe lending yields could be under compression from market share gains/competition. 
  • Despite a weak trading quarter for DBS, higher non-II provided support to total income, especially from WM fees (+41% QoQ, +26% YoY). If we strip out the amortized bancassurance contributions from Manulife of SGD26.5m per quarter, WM fees grew a remarkable 49% QoQ/31% YoY. We believe DBS is well-positioned in its digitalisation efforts and capabilities to capture market share gains in WM.
  • Out of SGD523m of new NPAs, c.SGD370m was from the three additional names moved into NPA this quarter in the 90-names portfolio.
  • With c.SGD570m in total now classified as NPLs in that portfolio, the remaining SGD880m that showed weakness remain at risk of being classified into NPLs this year. While new NPA formation is likely to ease, we believe provisions will stay elevated in FY17.



Maintain HOLD 

  • With the change in EPS, our assumed sustainable ROE is now 10.8% (10.4% previously), COE 10.5%, and growth rate 3.5%. This moves our target P/BV to ~1.1x (from ~1.0x previously). With that, our TP is raised by 6% to SGD19.18. 
  • Risks to our call are: 
    1. NIM improvement from higher rates; 
    2. higher non-interest income; and 
    3. benign credit costs.


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/ 2017-05-03
Maybank Kim Eng SGX Stock Analyst Report HOLD Maintain HOLD 19.18 Up 18.130



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