DBS Group Holdings (DBS SP) - UOB Kay Hian 2017-07-18: 2Q17 Results Preview ~ Sequential Pull-back From Near-Record Earnings In 1Q17

DBS Group Holdings (DBS SP) - UOB Kay Hian 2017-07-18: 2Q17 Results Preview ~ Sequential Pull-back From Near-Record Earnings In 1Q17 DBS GROUP HOLDINGS LTD D05.SI

DBS Group Holdings (DBS SP) - 2Q17 Results Preview ~ Sequential Pull-back From Near-Record Earnings In 1Q17

  • DBS Group's 2Q17 earnings are expected to recede 10.8% qoq from the near-record earnings in 1Q17.
  • Fees could have declined 8% qoq from the record high in 1Q17. Specific provisions are expected to have increased 19.5% qoq due to a drop in valuations for collaterals.
  • DBS has completed its review of dividend policy. We expect the upcoming interim dividend to rise from 30 cents to 32 cents/share. 
  • Maintain BUY. Target price: S$25.25.



WHAT’S NEW


Broad-based growth in loans. 

  • DBS Group Holdings (DBS) achieved growth in loans from corporate, trade and residential mortgages. We note that the interest rate differential between on-shore and off-shore renminbi has reversed back to positive territory, thus attracting a recovery in trade loans. 
  • Overall, management expects mid-single-digit loan growth for 2017.

Maintained stable NIM. 

  • SIBOR and SOR have moved mostly sideways during 2Q17.
  • NIM expanded 3bp qoq to 1.74% in 1Q17 and is expected to maintain at about the same level in 2Q17.

Fees eased on a sequential basis. 

  • We expect fees to recede by 2.5% yoy and 8.0% qoq in 2Q17 due to the high base in 2Q16 (boost from investment banking) and 1Q17 (boost from wealth management). 
  • Wealth management and trade fees could have risen by 10% and 5% yoy respectively. We expect net trading income of S$250m, which is relatively flat on a qoq basis.

Higher specific provisions. 

  • We expect NPL ratio to be unchanged at 1.44%. Specific provisions are expected to have increased 19.5% qoq to S$231m due to a drop in valuations of collaterals. In particular, any change in valuations for large and specialised vessels would have a significant impact on specific provisions.

Upside from more dividends. 

  • DBS’s fully phased-in CET-1 CAR improved 0.9ppt qoq to 14.2%, significantly above the minimum requirement of 9%, due to gains of S$350m from the divestment of PwC Building. 
  • Management is comfortable with CET-1 CAR of 12.5- 13.5%. We expect DBS to have completed the review of its dividend policy and a higher payout ratio would apply to both the interim and final dividend for 2017. 


STOCK IMPACT


Steady performance. 

  • We forecast a net profit of S$1,111m for 2Q17, up 5.7% yoy but down 10.8% qoq. This is a reasonable sequential pull-back from the near-record earnings of S$1,245m in 1Q17. 
  • We believe investors would be cheered by an expected higher dividend payout.

Ezra seeks to divest Lewek Constellation. 

  • Chinese contracting giant, Offshore Oil Engineering Company (COOEC), is looking to acquire ultra-deep water pipelay construction vessel Lewek Constellation from beleaguered Ezra Holdings. The vessel was built at a cost of US$625m. COOEC is expanding its fleet for sophisticated operations in harsh environments. It has expressed strong interest to acquire the vessel since Ezra started to pursue a sale and leaseback deal. A successful deal could help DBS recover loans extended to Ezra.


EARNINGS REVISION/RISK

  • We maintained our earnings forecasts.


VALUATION/RECOMMENDATION

  • Maintain BUY. Our target price of S$25.25 is based on 1.30x 2017F P/B, derived from the Gordon Growth Model (ROE: 10.1%, COE: 8.0% (Beta: 1.1x) and Growth: 1.0%).


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/ 2017-07-18
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 25.250 Same 25.250



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