DBS Group Holdings (DBS SP) - UOB Kay Hian 2017-08-07: 2Q17 Progressively Paying More Dividends

DBS Group Holdings (DBS SP) - UOB Kay Hian 2017-08-07: 2Q17 Progressively Paying More Dividends DBS GROUP HOLDINGS LTD D05.SI

DBS Group Holdings (DBS SP) - 2Q17 Progressively Paying More Dividends

  • DBS’ 2Q17 results were in line with expectations. It achieved broad-based growth in loans but fee income grew by a slower 4% yoy due to a high base in 2Q16.
  • Shareholders were rewarded with a 10% increase in interim dividend to 33 cents/share. Management updated its guidance on asset quality, which is in line with our assumptions. 
  • Maintain BUY. Target price: S$24.85.



RESULTS

  • DBS Group Holdings (DBS) reported net profit of S$1,130m for 2Q17, up 7.5% yoy, and in line with our expectations.
  • Broad-based loan growth from trade, corporate and housing. Loans expanded 6.6% yoy and 1.5% qoq, driven by Singapore (+1.6% qoq) and Rest of Greater China (+10% qoq). NIM was flat at 1.74%. Singapore provided positive impact of +2bp qoq. However, Hong Kong was affected by the drop in HIBOR, especially 1M HIBOR, as a result of excess liquidity, resulting in negative impact of 2bp qoq.
  • Non-interest income growth eased due to high base. Fees increased 4% yoy with strength in cards (+20% yoy) and wealth management (+37% yoy), partially offset by softness in investment banking (-51% yoy). DBS benefitted from two large IPOs - ManuLife US REIT and Frasers Logistics & Industrial Trust - in 2Q16.
  • Net trading income declined 3.9% yoy due to a reduction in renminbi hedging activities.
  • Income from investment securities was also 18% lower yoy.
  • Continued headwinds from offshore support services. NPL ratio inched marginally higher by 1bp qoq to 1.45%, affected by higher NPLs from Hong Kong and South & Southeast Asia. Specific provisions increased 56% qoq to S$301m due to exposure to offshore support services in Singapore and Hong Kong.
  • Most well capitalised. DBS’ fully loaded CET-1 CAR was stable at 14%, the highest among the three local banks.


STOCK IMPACT

  • Guidance for 2017. Management expects loans to grow 3% in 2H17, bringing full-year loan growth to 6% for 2017. NIM is expected to improve 2-3bp in 2H17 and should average 1.75-1.76% for the year. Management guided total provisions of S$1.0b-1.1b (2016: S$1.4b). Specific provisions could creep higher due to deterioration in valuations of collaterals.
  • Upside from higher dividends. DBS has completed the review of its dividend policy and increased 2017 interim dividend by 10% from 30 to 33 cents/share. Its scrip dividend scheme is applicable to the interim dividend. DBS’ payout ratio is manageable at 37% even after the hike in dividends. The review of Basel 4 by the Basel Committee should be completed by Oct 17. Management may review its dividend policy again if capital requirements from Basel 4 are clarified and finalised.


ESSENTIALS – HIGHLIGHTS FROM RESULTS BRIEFING 

  • Integration of ANZ’s wealth management business well underway. DBS has completed the acquisition of ANZ’s wealth management business across five markets, namely Singapore, Indonesia, Hong Kong, Taiwan and China, at S$110m above book value. The acquisition would progressively add AUM of about S$20b (S$8b-9b in 2H17).
  • Management estimated the acquisition would contribute income of S$125m in 2017 and S$475m in 2018.
  • Remnants of NPLs from oil & gas sector to be recognised in 2H17 and 2018. Management expects asset quality to be under pressure and heightened credit costs to persist due to depressed crude oil prices. DBS has exposure of S$3b to 90 smaller offshore support companies. About 60%, or S$1.8b, of these smaller accounts are deemed vulnerable, of which S$0.8b was recognised as NPLs as of Jun 17. 
  • Some S$500m of new NPLs could be recognised in 2H17 (total new NPLs in 1H17: S$1,180m) and the balance of another S$500m in 2018. This would necessitate specific provisions of S$250m-300m each in 2H17 and 2018.


EARNINGS REVISION/RISK

  • We keep our net profit forecasts for 2017-18F relatively unchanged as management’s guidance on asset quality is similar to our assumptions.


VALUATION/RECOMMENDATION

  • Maintain BUY. 
  • Our target price of S$24.85 is based on 1.29x 2018F P/B, derived from the Gordon Growth Model (ROE: 10.0% (previously 9.4%), COE: 8.0%, beta: 1.1x, Growth: 1.0%).




Jonathan Koh CFA UOB Kay Hian | http://research.uobkayhian.com/ 2017-08-07
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 24.85 Down 25.250



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