DBS Group Holdings (DBS SP) - UOB Kay Hian 2018-02-09: 4Q17 Dividend Bonanza

DBS Group Holdings (DBS SP) - UOB Kay Hian 2018-02-09: 4Q17: Dividend Bonanza DBS GROUP HOLDINGS LTD D05.SI

DBS Group Holdings (DBS SP) - 4Q17: Dividend Bonanza

  • DBS Group's 4Q17 results were above expectations due to significant NIM expansion and moderation in credit cost. DBS declared a final dividend of 60 S cents per share and special dividend of 50 S cents per share as Basel III reforms were finalised.
  • Reducing surplus capital improves 2018 ROE by 0.3ppt to 11.1%. DBS' new dividend policy is to maintain annualised dividend at S$1.20 per share, representing a dividend payout ratio of 57% for 2018. 
  • Re-iterate BUY. Target price: S$30.40.



RESULTS

  • DBS Group Holdings (DBS) reported net profit of S$1,194m for 4Q17, up 30.8% y-o-y and above our forecast of S$1,101m.

Growing in Hong Kong and Greater China. 

  • Loans grew 7.3% y-o-y and 2.8% q-o-q. Underlying loans expanded S$9b q-o-q, driven by trade loans (S$2b), corporate loans (S$4b) and consumer loans (S$3b). Consolidation of ANZ’s wealth management and retail banking businesses in Taiwan added loans of S$2b q-o-q. From a geographical perspective, loan growth was driven by Hong Kong (+2.5% q-o-q) and Greater China (+7.2% q-o-q). 
  • NIM expanded 7bp y-o-y and 5bp q-o-q to 1.78% due to higher SIBOR and SOR.

Non-interest income seasonally softer. 

  • Fees increased 23.5% y-o-y, driven by wealth management (+43.7% y-o-y) and cards (+9.4% y-o-y). Net trading income was seasonally softer at S$228m. 
  • DBS also booked gains from investment securities at S$107m.

Asset quality stabilised. 

  • NPL formations eased substantially in 4Q17 after the massive clean-up of legacy NPLs, leveraging on the transition to FRS109 in 3Q17. NPL balance dropped 0.6% q-o-q while NPL ratio improved 6bp q-o-q to 1.68%. Total provisions also declined 51% y-o-y to S$225m in 4Q17.

Shareholders rewarded with special dividend. 

  • DBS declared a final dividend of 60 S cents per share and special dividend of 50 S cents per share as Basel III reforms were finalised in Dec 17. 
  • Its scrip dividend scheme has been suspended as DBS is already well capitalised.


STOCK IMPACT


Positive outlook for 2018. 

  • Management guided for loan growth at 7-8% and expects an NIM uplift from higher interest rates in 2018. Income is expected to increase at a low double-digit level. 
  • Cost-to-income ratio is expected to be stable at 43% due to consolidation of ANZ's Taiwan and Indonesia operations, which have higher cost-to-income ratios. Management aims to improve cost-to-income ratio by 0.5ppt annually in 2019 and 2020. 
  • DBS also plans to embark on a re-architecture of its data infrastructure. Specific provisions are expected to be at the lower end of its cycle average.

The Chinese are back. 

  • The interest rate differential between on-shore and off-shore renminbi has reversed back to positive territory (lower interest rates in offshore markets), thus attracting a recovery in trade loans. 
  • The strength of the renminbi will also attract Chinese companies to borrow in US dollars offshore in Singapore and Hong Kong. Thus, we are likely to witness a return of the boom in trade finance.

DBS will explore digital banking initiatives in Hong Kong, China and Vietnam.

  • Basel III reforms have limited impact. Risk-weighted assets are expected to increase about 5% by 2022 (2% rise in Jan 19 and 3% growth in Jan 22), compared with management's previous expectation of about 10%. Thus, management has decided to return surplus capital to shareholders via a special dividend of S$0.50. DBS' new dividend policy is to maintain an annualised dividend of S$1.20 per share, representing an 81.8% increase. Management targets to increase absolute dividend over the longer term.

Implication of new dividend policy. 

  • We estimate that DBS’ dividend payout ratio has increased to 57% for 2018, compared to 36% two years ago. ROE has improved to 11.1% for 2018, compared to our previous estimate of 10.8%, by returning surplus capital to shareholders. 
  • Some investors were unduly worried that DBS would deploy its surplus capital in an aggressive bid to acquire another major regional bank. DBS has snuffed out the possibility of a major M&A by channelling more financial resources towards rewarding shareholders through a higher regular dividend payout.


EARNINGS REVISION/RISK

  • We raise our net profit forecast for 2018 by 3.5% due to lower credit costs. 
  • We cut our net profit forecast for 2019 by 2.5% as cost rationalisation was lower than expected.


VALUATION/RECOMMENDATION

  • Re-iterate BUY. Our target price for DBS of S$30.40 is based on 1.62x 2018F P/B, which is derived from the Gordon Growth Model (ROE: 11.1%, COE: 8.0% (Beta: 1.1x) and Growth: 3.0%).




Jonathan Koh CFA UOB Kay Hian | http://research.uobkayhian.com/ 2018-02-09
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 30.40 Up 29.500



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