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DBS Group Holdings - UOB Kay Hian Research 2015-10-19: 3Q15 Results Preview ~ Weakness In Market-Sensitive Revenue Streams

DBS Group Holdings - UOB Kay Hian Research 2015-10-19: 3Q15 Results Preview ~ Weakness In Market-Sensitive Revenue Streams DBS GROUP HOLDINGS LTD D05.SI 

DBS Group Holdings (DBS SP) 3Q15 Results Preview: Weakness In Market-Sensitive Revenue Streams 

  • We expect DBS’s net profit to decline 4.1% qoq to S$1,071m in 3Q15 due to weakness in market-sensitive revenue streams, such as wealth management and investment banking. 
  • Asset quality should remain resilient, which is a positive surprise, given the gloomy sentiment in financial markets. 
  • Maintain BUY. Target price: S$23.75. 


WHAT’S NEW 


Loans expanded with currency appreciation. 

  • We expect underlying loan growth in constant currency terms to be subdued. Loan growth in Singapore could be quite restricted to housing loans. Nevertheless, there is a slight boost from the strength in the US dollar and HK dollar, which appreciated 5.3% against the Singapore dollar in 3Q15. The US$- and HK$ loans accounted for 31.7% and 12.2% of total loans respectively. 

Net interest margin (NIM) is expected to be stable in 3Q15. 

  • The impact of higher SIBOR and SOR, if sustained, would be felt mainly in 4Q15. 

Moderation in fee income. 

  • Financial markets were volatile and fees from market-related sources, such as wealth management and investment banking, were likely to be affected. Investors could have held back from taking up fresh positions, which affected contributions from wealth management. Contribution from investment banking would probably be lacklustre as DBS did not complete any IPO in 3Q15. 

A challenging environment for treasury operations. 

  • The sudden plunge in regional currencies after People’s Bank of China (PBOC) changed the methodology for fixing the renminbi created uncertainty in the contribution from the treasury business. However, we do anticipate the flows from customers to be sustained and expect net trading income to be relatively unchanged on a sequential basis. 

Asset quality resilient. 

  • Management was adamant that there is no deterioration in asset quality. DBS reviews its loan portfolio on a regular basis. Exposure to oil & gas and commodities are about S$20b and S$30b respectively. While the exposure is sizeable, there is no deterioration from these two sectors. Asset quality for China should be stable. Credit cost is expected to be relatively unchanged. 

STOCK IMPACT 

  • Weakness in market-sensitive revenue streams. We expect DBS’s 3Q15 results to reflect its resilient asset quality. Nevertheless, the soft non-interest income could take the shine off DBS's impeccable ability to consistently deliver good results. 
  • We forecast DBS to report net profit S$1,071m for 3Q15, up 6.3% yoy but down 4.1% qoq. According to consensus estimate, DBS is expected to clock a net profit of S$1,057m in 3Q15. 

EARNINGS REVISION/RISK 

  • We maintain our earnings forecasts. 

VALUATION/RECOMMENDATION 

  • Maintain BUY. Our target price of S$23.75 is based on 1.5x P/B, which is derived from the Gordon Growth Model (ROE: 11.2%, required return: 7.8% and constant 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 UOB Kay Hian | http://research.uobkayhian.com/ 2015-10-19
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 23.75 Same 23.75


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