DBS Group - CIMB Research 2015-11-02: Slower IB-related fees, no NPL red flag yet

DBS Group - CIMB Researc 2015-11-03: Slower IB-related fees, no NPL red flag yet DBS GROUP HOLDINGS LTD D05.SI 

DBS Group - Slower IB-related fees, no NPL red flag yet 

  • 3Q net profit (S$1,066m) was within our expectations but above consensus. 
  • Positives were margin expansion, muted credit costs. Negatives were slow IB, WM brokerage fees, treasury. Weak 3Q market-related income featured for all banks. 
  • NPL (0.9%) and SPs (20bp of loans) was stable, more GPs saw total provisioning rise 30% qoq; albeit all these were lower-than-expected. 3Q ROE was 11.6%. 
  • We roll forward our target price to S$19.58 (1.16x CY16 P/BV). Maintain Add. Shortterm catalyst is a recovery in capital markets; medium-term, rising interest rates. 

Best net interest margins in four years 

  • DBS 3Q15 NII (+4% qoq) looked the best among peers on a combination of margin improvement (+3bp) and loan growth (+2%); albeit partly helped by forex. 
  • DBS’s best NIMs in four years, came from S$ loan re-pricing (rising SIBOR) and efforts to rein in deposit costs. 
  • Forex inflated headline loan growth. 
  • Underlying loans (-1% constant currency) saw a steep fall-off in trade loans (offshore-onshore rate went negative, postRMB devaluation) but this was partially offset by Singapore property-related loan growth. 

Market-related fees slowed, similar to peers 

  • Overall fee income fell 11% qoq, hurt by lower capital markets-related fee stream as IB (-40% qoq), WM (-22%), brokerage (-20%) waned; this was expected. 
  • Trading-related income was however, better-than-expected for this climate. 
  • Two big one-off swing items essentially offset: gains from HK property disposal was negated by a one-off accounting charge (-S$50m) from the first-time adoption of fair valuation adjustment (FVA) for derivatives i.e. trading would have stronger if not for accounting. 

Negative jaws due to a variety of adjustment factors 

  • DBS resonating positive in recent quarters is NII growth. In 3Q where weak investment markets posed a drag, NII growth kept topline flat (+0.8% qoq).
  • In the context of a flat topline, headline cost growth (+13.5% yoy) and 3Q cost ratio (46%) looked high, but this was recognisably inflated by: 
    1. one-off FVA charge, and 
    2. some remnant one-off M&A costs. 
  • Ex-these, total expense were +9% yoy and cost ratio stable at 45%. 

Attention should focus on potential risky loan book exposure 

  • Like the market, our attention was focused on potential bad debt risks. DBS quantified its commodity exposure (7% of Group loans) and oil and gas exposure (8%), these overlapped though. Among its S$21bn commodity exposure, S$9bn is to producers, and S$12bn to traders. A large portion of loan exposure to producers is to the oil and gas sector, of which the exposure is largely to state-owned companies. 
  • On exposure to traders, a large portion is trade-related. We share more color in a subsequent section. 

Maintain Add, roll forward target price now based on FY16 P/BV 

  • We roll forward to an end-16 target price (GGM, 1.16x FY16 P/BV). A year ago, DBS was viewed as the best interest rates play. A year on, the margin uptick has arrived, albeit modestly; but, prospects for significant rate hikes into 2016 has dimmed. 
  • Still, 3Q’s respectable 11.6% ROE was achieved amidst hollowing trade finance and shaky markets. 
  • Ahead, a better environment for capital markets, China’s trade flows will boost ROE and earnings. Higher provisioning explains why we are 10% below consensus.

Kenneth NG CFA CIMB Securities | Jessalynn CHEN CIMB Securities | http://research.itradecimb.com/ 2015-11-02
CIMB Securities SGX Stock Analyst Report ADD Maintain ADD 19.58 Up 18.68