DBS Group - RHB Research 2015-10-15: Credit Cost To Normalise In 3Q15

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DBS GROUP HOLDINGS LTD D05.SI 

DBS Group - Credit Cost To Normalise In 3Q15 

• We expect 3Q15 net profit to decline 5% QoQ on lower non-II and normalisation of credit cost, while NPLs would likely tick-up but remain manageable. 
• Maintain BUY, as DBS is our preferred Singapore bank stock, but we tweak FY15F-16F earnings down by 2-2.5% and lower our GGM-based TP to SGD21.10 (from SGD23.30, 21% upside). 
• A key positive catalyst for the share price would come from the US rate lift-off. 

 3Q15 net profit to decline 5% QoQ. 

• DBS is scheduled to release its 3Q15 results on the morning of 1 Nov. We expect the bank to report a net profit of SGD1,058m, down 5% QoQ but up 5% YoY. 

 Lower non-interest income (non-II), higher provisions. 

• We believe DBS’ 3Q15 performance would be weighed down mainly by a: 
  1. 35% QoQ decline in non-II following the strong 11% YoY increase in 1H15 as net trading and investment gains would likely be impacted by a rise in bond yields since mid-May, and a 
  2. 35% QoQ increase in impairment charges as credit cost normalises from a low 19bps in 2Q15. 

 Earnings forecasts and TP tweaked. 

• Our net profit is lowered by 2% for FY15F and 2.5% for FY16F as we: 
  1. trim loan growth assumptions to 3.8% (from 5%) for FY15F and 5% for FY16F (from 6%), and 
  2. raise credit cost for expected increase in asset quality stress. 
• Our GGM-derived TP is revised to SGD21.10 (from SGD23.30), which implies a FY16F P/BV of 1.26x (historical mean: 1.15x, +1SD: 1.30x) and P/E of 11.1x (historical mean: 11.4x). 

 Key risks. 

• Key factors that would impede DBS’ share price from reaching our target are: 
  1. a sharper-than-expected slowdown in China and other major economies, 
  2. further delays in the US rate lift-off, and 
  3. a larger-than-expected increase in non-performing loans (NPLs). 

 Reiterate BUY. 

• We reiterate our BUY call on DBS as the preferred pick among Singapore banks. The US Federal Reserve’s rate hike would be a key positive catalyst, with net interest margins (NIMs) expected to improve, helped by its strong low-cost deposits franchise. 
• Relatively lower exposure to ASEAN would also mean lower asset quality risks.

Singapore Research RHB Securities | http://www.rhbgroub.com/ 2015-10-15

RHB Securities SGX Stock Analyst Report BUY Maintain BUY 21.10 Down 23.30