DBS Group Holdings (DBS SP) - UOB Kay Hian 2017-11-07: 3Q17 Brutal Cleansing Of Exposure To O&G

DBS Group Holdings (DBS SP) - UOB Kay Hian 2017-11-07: 3Q17: Brutal Cleansing Of Exposure To O&G DBS GROUP HOLDINGS LTD D05.SI

DBS Group Holdings (DBS SP) - 3Q17: Brutal Cleansing Of Exposure To O&G

  • DBS Group's net interest income and fee income grew 8.8% yoy and 11.6% yoy respectively, while pre-provision operating profit increased 2.9% yoy to reach a new high of S$1,781m.
  • Management cleaned up exposures to O&G support services by recognising additional NPLs of S$1,741m. Specific provisions of S$1,538m were cushioned by write-back in general provisions of S$850m, which should be read as part of DBS’ transition to FRS 109. 
  • Maintain BUY. Target price: S$24.40.



RESULTS

  • DBS reported a net profit of S$802m for 3Q17, down 25.1% yoy and 23.5% below our forecast of S$1,048m.

Acquisition boosted loan growth. 

  • Loans expanded 8.5% yoy and 3.7% qoq, driven by broad-based growth in corporate loans and Singapore housing loans. The consolidation of ANZ added S$5.7b in loans (housing loans: S$3.5b and professionals & private individuals: S$2.2b). Excluding ANZ, underlying loan growth would be 1.9% qoq.
  • NIM was stable at 1.73%, held back by a lower loan-to-deposit ratio of 86.8% which was down 1.6ppt qoq. Deposits expanded 11.7% yoy and 5.6% qoq. The consolidation of ANZ added S$10.3b in deposits in Singapore and Hong Kong (current and savings deposits: S$4.8b). Excluding ANZ, underlying deposit growth would be 2.6% qoq.

Achieved double-digit growth in fee income. 

  • Fees increased 11.6% yoy boosted by wealth management (+35% yoy), investment banking (+19% yoy) and cards (+13% yoy).
  • Its wealth management business benefitted from strong sales for unit trusts and other investment products. It booked higher advisory income due to the IPO of NetLink NBN Trust, the largest IPO in Singapore this year.

Clean-up of exposure to O&G sector. 

  • NPL balance increased 24.1% qoq and NPL ratio deteriorated by 29bp qoq to 1.74%. DBS accelerated the recognition of residual weak oil & gas (O&G) support service exposure of S$1,741m (two large accounts and several small accounts) as NPLs so as to remove uncertainty over asset quality.
  • Specific provisions for loans ballooned to S$1,538m due to exposure to O&G support services under Singapore as well as South and Southeast Asia, which was partially offset by write-back in general provisions of S$850m (part of surplus over FRS 109 that would have to be transferred to shareholders' fund on 1 Jan 18). It has marked down vessel collaterals by 75% to liquidation values as of Sep 17. Specific provisions cover 50% of secured NPLs and 100% of unsecured NPLs.

Well capitalised. 

  • DBS remains well capitalised with a fully loaded CET-1 CAR at 13.6%.


STOCK IMPACT


Clearing the deck. 

  • Management has cleaned up its exposure to the O&G support services industry, given the opportunity afforded by the transition to FRS 109. 
  • Excluding Swiber, four out of five large accounts for O&G support services have already been recognised as NPLs. It has also marked down vessel collaterals by 75% to liquidation values as of Sep 17.

Putting the worst from O&G sector behind us. 

  • We are neutral on the brutal clean-up of exposure to the O&G support services industry. The deterioration in asset quality was worse than expected. Fortunately, the transition to FRS 109 gave DBS the opportunity to clear the deck and remove uncertainty over asset quality.


ESSENTIALS – HIGHLIGHTS FROM RESULTS BRIEFING


Initial guidance for 2018. 

  • Management expects DBS to achieve double-digit earnings growth (teens) for 2018. Loan growth is guided to be at 7-8%, driven by building & construction, property development, manufacturing, commodities & trading and residential mortgages. 
  • Management expects healthy growth from wealth management, cash management and synergistic benefits from the acquisition of ANZ wealth management and retail banking operations in Singapore and Hong Kong. 
  • Specific provisions should be lower than the through-the-cycle level of 27bp.

Not disposing of office properties in Hong Kong. 

  • Management disclosed that DBS owns a couple of floors at The Center (99 Queen’s Road) in Hong Kong. Cheung Kong recently sold 75% of the 73-storey building (48 floors) at a record price of HK$40.2b or HK$33,000 psf. However, management does not intend to divest at this juncture.

Gradual NIM expansion. 

  • Management expects NIM to expand by 2bp in 4Q17.


EARNINGS REVISION/RISK

  • We cut our net profit forecast for 2017 by 4.9% due to the dismal 3Q17 results. Our net profit forecast for 2018 remains relatively unchanged as our existing numbers are in line with management’s initial guidance.


VALUATION/RECOMMENDATION

  • Maintain BUY. Our target price for DBS of S$24.40 is based on 1.30x 2018F P/B, which is derived from the Gordon Growth Model (ROE: 10.1%, COE: 8.0% (Beta: 1.1x) and Growth: 1.0%).




Jonathan Koh CFA UOB Kay Hian | http://research.uobkayhian.com/ 2017-11-07
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 24.40 Same 24.480



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