DBS Group (DBS SP) - Maybank Kim Eng 2017-08-07: Patience Is A Virtue

DBS Group (DBS SP) - Maybank Kim Eng 2017-08-07: Patience Is A Virtue DBS GROUP HOLDINGS LTD D05.SI

DBS Group (DBS SP) - Patience Is A Virtue


1H17 missed slightly; cut FY17E EPS but raised FY18-19E 

  • 1H17/2Q17 core PATMI of SGD2.3b (+3.2% YoY) and SGD1.1b (-6.2% QoQ, +7.1% YoY) respectively. 
  • 1H17 earnings were slightly below our expectation and met 45% of our previous FY17 forecast of SGD5.1b. 
  • We reduced our FY17E net profit slightly by ~2% as we:
    1. lowered our expectations of higher net interest income; and
    2. reduced our non-interest income forecast, mainly for lower trading income.
  • But we raised FY18-19E net profit slightly by ~1% on higher income. 
  • Our TP is raised to SGD21.50 after rolling forward valuations to FY18 and pegging to an unchanged 1.1x FY18E P/BV, slightly below its 10-year mean of 1.2x. 
  • With limited upside to DBS' current share price, maintain HOLD.


Beneficiary of rising rates 

  • Loan growth in 2Q17 remained healthy at 5% YoY in constant currency terms. Given sanguine economic prospects and recovery in the Singapore property market, we remain optimistic and raised our FY17-18E loan growth to 6-8% (from ~6% previously). This is ahead of management’s guidance of a mid-single digit growth for FY17. 
  • Customer spreads improved to 2.03% in 2Q17 (1Q17: 1.99%). However, we lowered our FY17E NIM from 1.80% to 1.77%, although this is still slightly ahead of management guidance of 1.75-1.76%. 
  • While we believe DBS is a key beneficiary of rising rates, lending yields could come under some compression due to competition and the need to offer more attractive rates to gain market share.


Specific provisions for O&G to remain high 

  • Management guided specific provisions will be around SGD1b for FY17- 18E mainly due to exposures to the O&G support services sector. This is not new as more restructuring and decline in collateral value of the vessels could require higher specific provisions. 
  • Our estimates factored in SGD1.3-1.4b of provisions for FY17-18E.


Maintain HOLD 

  • With the change in EPS, our assumed sustainable ROE is now 11.1%, COE at 10.5%, and growth rate at 3.5%. Our target P/BV is maintained at 1.1x. 
  • Our TP is raised to SGD21.50 after rolling forward to FY18E. 
  • Risks to our call are:
    1. NIM improvement from higher rates;
    2. higher non-interest income; and
    3. lower provisions.


1H17/2Q17 results snapshot 

  • 1H17 and 2Q17 core PATMI were SGD2.3b (+3.2% YoY) and SGD1.1b (-6.2% QoQ, +7.1% YoY) respectively. 1H17 earnings were slightly below our expectation and met 45% of our previous FY17E forecast of SGD5.1b.
  • 2Q17 NIM was flat QoQ at 1.74% due to softer HIBOR rates as loans were priced off 1M HIBOR. 
  • There are a few positives:
    1. healthy loan growth of 5% YoY in 2Q17 in constant currency terms;
    2. cost-income ratio maintained at 43% from strategic cost management and improved productivity from digitalization efforts; and
    3. fully-loaded CET1 capital ratio remains the strongest among peers at 14%.
  • For FY17, management guided mid-single digit loan growth, NIM of 1.75- 1.76% on average, and cost-income ratio of 43%. 
  • Management expects specific provisions to be around SGD1.1b mainly from exposures to the O&G support services sector.


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/ 2017-08-07
Maybank Kim Eng SGX Stock Analyst Report HOLD Maintain HOLD 21.50 Up 19.180



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