DBS Group - Above Consensus 1Q
- Record net fee income.
- Improving outlook.
- Raised FV to S$19.97.
Improvement on several fronts
- DBS reported 1Q17 net earnings of S$1.21b this morning, up 1% YoY or 33% QoQ, and higher than consensus estimates of S$1.12b as polled by Bloomberg. Including one-off items, net profit was S$1.25b.
- While Net Interest Income was flat, Non-interest Income improved QoQ and YoY, and this was largely due to better Fee & Commission Income as well as higher Net Income from Investment Securities.
- Allowances remained elevated at S$550m this quarter, up from S$462m in the previous quarter. Net Interest Margin (NIM) improved from 1.71% in the last quarter to 1.74% this quarter. NPL ratio stayed flat at 1.4% QoQ.
Guidance points to better earnings outlook
- Buoyed by a better market, DBS’s 1Q17 result was supported by gains on several fronts including its wealth and consumer banking business (higher investment products and unit trust sales), but Treasury Markets saw a drop in income. AUM hit S$170b, with strong Wealth Income of S$516m.
- In terms of outlook, management has guided for mid-single digit loans growth, and expects NIM to be at 2016 average if rate assumptions materialise. It expects cost-income ratio to hold at 43% in 2017 (43.2% in 1Q17).
- It also guided for NPL formation to moderate from 2016 level; and expects total allowances to be similar to 2016, ex Swiber (total allowances was S$1434m in 2016). HK doubled earnings QoQ due to higher income and lower expenses and NIM improved from 1.64% last quarter to 1.79% this quarter.
- Management expects NPLs to continue in the Oil & Gas support services sector, but to come off from last year’s level.
Upping FY17 estimates; FV increased to S$19.97
- The worst appears to be over for its NPLs and the earnings outlook is improving, especially with potentially higher interest rates on the local front. With a healthy loans pipeline, still growing wealth income and a careful watch over cost, we have taken the above into our earnings projections, raising our F17 earnings from S$4488m to S$4674m.
- Together with the recent re-rating, we have also upped our valuation metric, increasing our fair value estimate from S$18.99 to S$19.97.
- DBS has done well, up 12% YTD. At current price, we maintain our HOLD rating.