DBS GROUP HOLDINGS LTD
D05.SI
Factoring in weaker fees, NPLs
- DBS has been the market’s favourite play on rising rates, while its non-NII outperformance was led by capital markets related activities. We trim our expectations of both given recent market volatility. We also add on credit costs given its biggest exposure to oil & gas names.
- Even after factoring in recession assumptions, DBS’s average FY15-17 ROE remains above our cost of equity (9.5%). We believe this drives a fair value multiple of 1.16x P/BV, hence our Add rating on the stock.
- Our new GGM-based target price falls to S$18.68 after the EPS cuts.
Tapering our non-NII assumptions
- Several quarters of outperformance in DBS’s non-NII have led to positive consensus earnings revisions (CIMB included). The strong non-NII growth was especially driven by capital markets related activities such as wealth management, stockbroking, trading – all of which we believe will take a hit amidst a market downturn.
- As such, we lower our non-NII growth assumptions for FY15/16/17 to +6.4%/+2.8%/+3.9% (from +14.8%/ +10.5%/+6.6%) previously. Our expectations of slight non-NII growth in FY16 (vs. flat for peers) is premised on its US$1.2bn bancassurance deal with Manulife, which starts Jan 2016.
Fear of NPLs from oil & gas
- Our biggest fear for DBS is potentially high NPLs from its oil & gas portfolio, which makes up 7% of its loans (highest among the Singapore banks). As oil prices continue to be depressed, some drilling jobs will be at risk of cancellations, while day rates and utilization of offshore vessels will fall. In such a scenario, customers may not be able to make their loan repayments given the diminished cash flow.
- However, DBS’s lack of an ASEAN presence gives us comfort that it would be less affected by ASEAN NPLs than UOB and, to a lesser extent, OCBC. Its Singapore mortgage portfolio also has the highest proportion of HDB loans vs. private property loans, which tend to have more resilient credit quality. We raise our credit cost assumptions for FY15/16/17 to 25bp/50bp/33bp, still below the 120bp that it saw in 2009.
Remains the biggest beneficiary of rising rates
- DBS has been the market’s favourite as a play on rising rates, given its highest CASA ratio among the Singapore banks. However, the recent market meltdown and slowdown in China have dimmed prospects of a US Fed rate hike in September, which could delay NIM expansion.
- We lower our NIM assumptions for FY16-17 by 1bp, which results in a marginal cut in our net interest income forecasts.
VALUATION AND RECOMMENDATION
- We maintain our Add call on DBS, but our target price falls to S$18.68 (based on GGM, 1.16x CY15 P/BV) after the cuts to our EPS forecasts. After the steep market sell down, the stock trades at 1.09x CY16 P/BV and 9.3x CY16 P/E after we build in recession assumptions.
- DBS is the biggest beneficiary in a rising rate environment, but recent market volatility could lead to a delay in a US Fed rate hike –the market currently expects that to happen in Sep. If a delay occurs, there may be a negative reaction to DBS’s share price as it is seen as the purest play on rising rates among the Singapore banks.
- We also see potential risks of NPLs, especially in the oil & gas sector, where DBS has a larger exposure than OCBC and UOB. While oil & gas loans form an estimated 7% of its loan book, the loss at default could be large, especially if oil prices continue to remain low.
Kenneth NG CFA | Jessalynn CHEN | http://research.itradecimb.com/ CIMB Securities 2015-08-26
18.68
Down
23.54
