CIMB Research 2015-07-28: DBS Group Holdings - Stronger IB, lower credit costs. Maintain ADD.

Stronger IB, lower credit costs 

  • DBS’s 2Q15 net profit of S$1,117m was 7%/6% better than our/consensus expectations. 
  • 1H15 profit made up 53% of our FY15 estimates. 
  • The quarter had no asset growth, but lots of margin upside, as expected. 
  • Unexpected positives were stronger non-interest income, particularly from IB, wealth management, treasury and lower provisions. 
  • We hike our FY15-16 EPS by 2-3% and our GGM-based target price goes up accordingly to S$23.54 (1.45x CY16 P/BV). 
  • Maintain Add. 
  • Catalysts lie in the tailwind Hong Kong provides to earnings. 

No loan growth, but margins bounce back up 

  • DBS’s loan book shrank (-0.3% qoq) due to currency effects (strong S$), but even ex-currency effects, the loan growth (+1% qoq) was marginal, mostly from market share gains in Singapore mortgages. 
  • NII growth (+3% qoq) was solely on margins. NIMs expanded 6bp, 2/3 of that due to the continued re-pricing of S$ loans and 1/3 from a leaner balance sheet and the weeding-out of excess US$ funding. 
  • DBS trimmed its loan growth guidance (+5% yoy, local currency terms) for FY15, highlighting that actual credit demand is weak. 
  • The small positives in asset growth come from higher mortgage applications recently, and a stabilisation of the trade book. 
  • CEO Piyush Gupta explains that these are due to particular DBS initiatives and is not reflective of a strong environment. 

Trade slows but non-interest income delivers on deals 

  • 2Q’s beat was mostly on non-NII, and partly on lower provisions (SP 19bp of loans). 
  • Trade and loan fees slowed as expected, but DBS did surprisingly well in IB, stockbroking and showed continued strength in WM (wealth management). 
  • DBS explained that broking benefited a little from StockConnect while IB fees did well on nine bond deals and a fair bit of advisory work. 
  • DBS guides that while 3Q broking might come off slightly, the IB pipeline should sustain 2Q’s activity levels. 
  • WM is still a steady growth business. 
  • DBS HK did particularly well this quarter, with non-NII +33% qoq on the back of WM, cards and brokerage. 
  • The DBS HK platform is proving to be a differentiator in 2Q. 

Capturing market share, investing for the future, hiking DPS 

  • We like the trends we see. 
  • First, DBS is gaining market share (trade, mortgage loans) in a slow-growth environment. 
  • Two, investments in the digital space is reaping gains, in terms of customer growth and cost savings. 
  • Three, there seems to be confidence in earnings growth as it hikes interim DPS to 30 Scts. 

(Kenneth NG, CFA; Jessalynn CHEN)