UOB Kay Hian Research 2015-07-28: DBS Group - 2Q15: Steady Broad-based Growth. Maintain BUY.

2Q15: Steady Broad-based Growth 


  • The good set of 2Q15 results was achieved through broad-based improvements in net interest income, fee income, treasury income and credit costs. 
  • While short of being spectacular, the results are once again demonstrate DBS’ ability to generate organic growth and its consistency in delivering quality earnings. 
  • Maintain BUY. Target price: S$25.12. 


RESULTS 


 DBS reported net profit of S$1,117m for 2Q15, above our forecast of S$1,038m and consensus estimate of S$1,055m. 


 Moderation in loan growth. 

  • Loans contracted 0.3% qoq but were up 8.8% yoy in 2Q15. 
  • Trade and consumer loans grew 1% qoq, based on constant-currency terms. 
  • Overall, loans were dragged into negative territory due to repayment of corporate loans and currency translation effects (the Singapore dollar appreciated 1.8% against US$ and HK$). 

 Benefitting from higher interest rates. 

  • Net interest margin (NIM) expanded 6bp qoq to 1.75% due to re-pricing of loans in Singapore and lower cost of funds. 
  • Deposits contracted 5.7% qoq as surplus high-cost fixed deposits (-12.3% qoq) were allowed to run off. 
  • Loan-to-deposit ratio rose from 86.5% to 91.6%. 
  • Net interest income increased 11.9% yoy 

 Healthy growth in fees. 

  • Fee income increased 15.7% yoy to S$582m with growth from loans processing, cards and wealth management. 
  • On a sequential basis, there was improvement in contributions from stockbroking (boost from Hong Kong-Shanghai Stock Connect) and investment banking (issuance for fixed income securities). 

 Stable contribution from treasury. 

  • Net trading income remained strong at S$273m, although it receded from an exceptionally high of S$356m in 1Q15. 
  • Customers’ flow accounted for 55% of treasury income. 

 Asset quality stayed resilient. 

  • There were slight increases in NPLs in Singapore and Hong Kong due to exposure to SMEs, which were offset by lower NPLs from China and India. Thus, NPL ratio was unchanged at 0.9%. 
  • General provisions declined in tandem with lacklustre loan growth. 


STOCK IMPACT 


 Shareholders rewarded with more dividends. 

  • The good set of results was achieved through broad-based improvements in net interest income, fee income, treasury income and credit costs. 
  • DBS declared an interim dividend of 30 S cents/share (1H14: 28 S cents/share). 

 Loans to benefit from deal flows. 

  • Management has maintained guidance for loan growth at 5% for 2015. 
  • Loans expanded 1.6% in 1H15. Management expects loans to increase by about 2% per quarter in 2H15, driven by deal- related lending, such as restructuring, merger & acquisition and privatisation. NIM is expected to be relatively unchanged in 2H15. 

 Gaining market share in bancassurance. 

  • DBS has revamped its processes for distribution of insurance products. 
  • Management estimated its bancassurance market share at 35%, overtaking OCBC to be ranked no. 1. Sales have increased 32% yoy, based on annual premium equivalent. 

 Housing loans alive and kicking. 

  • Housing loans expanded by S$0.7b or 1.3% qoq despite the drop in sales of private residential properties. Management explained that the increase came from drawdown of existing loans and new bookings from refinancing. 


EARNINGS REVISION/RISK 


  • We raise our net profit forecast for 2015 by 1.9% as the 2Q15 results were better than anticipated. 


VALUATION/RECOMMENDATION 


 Maintain BUY. 

  • Our target price of S$25.12 is based on P/B of 1.59x, derived from the Gordon Growth Model (ROE: 11.5%, COE: 7.8% and Growth: 1.5%). 


SHARE PRICE CATALYST 


 DBS focuses on its nine strategic priorities to grow organically. 

  • Growth drivers include regional businesses such as global transaction service, wealth management and SMEs. 
  • Growth from overseas markets, such as China, Hong Kong, India, Indonesia and Taiwan.


(Jonathan Koh, CFA)

Source: http://research.uobkayhian.com/



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