DBS - RHB Invest 2015-11-03: Asset Quality Holding Up Well

DBS GROUP HOLDINGS LTD D05.SI

DBS (DBS SP) - Asset Quality Holding Up Well

3Q15 earnings came in slightly ahead of expectations.
Maintain BUY and SGD21.10 TP (22% upside), which implies 1.3x FY16F P/BV.
Underlying operations were healthy while asset quality was stable.
Management expects better earnings in 2016, underpinned by 7-8% topline growth and moderate rise in credit costs.
Exposure to China and commodities are likely to remain resilient.

DBS posted 3Q15 earnings of SGD1,066m (-5% QoQ, +6% YoY) while 9M15’s SGD3,316m core net profit (+10% YoY) was 78%/77% of our/consensus’ 2015F earnings of SGD4,266m/SGD4,311m respectively.
The sequential decline in 3Q15 earnings was mainly on higher general provisions and a SGD50m charge from first-time adoption of a funding valuation adjustment for derivatives.
Underlying operations were healthy while asset quality was stable.

Key positives for 3Q15 are a healthy net interest income growth of 4% with net interest margin (NIM) up 3bps QoQ and gross non-performing loan (NPL) down 1% QoQ to SGD2,471m.
Key negatives include:
1. loans dipping 1% QoQ in constant currency terms mainly on the 10% decline in trade loans;
2. net fee income falling 11% QoQ as volatility in the financial markets led to lower income from wealth management, investment banking and stockbroking; and
3. fully-loaded Common Equity Tier 1 (CET1) ratio falling to 11.9% (June: 12.3%) on a currency translation effect on risk weighted assets and payment of interim dividends.

With no significant stress seen across its loans portfolio, management expects moderate non-performing loans (NPLs) and credit costs in 2016. Based on the internal stress tests of the bank’s oil & gas exposure, management estimates that additional provisions would be < SGD100m.
DBS is confident that its loan books would remain resilient given the good quality of its commodities exposure.

Management is optimistic that DBS’ topline can grow by 7-8% in 2016 on 5% loan growth, stable NIM and low-teens rise in non-interest income (non-II). With moderate increases in credit costs and operating expenses, this should filter down to bottomline growth.
We make no change to our earnings forecasts and GGM-based SGD21.10 TP, which implies 1.3x FY16F P/BV. DBS remains our preferred pick among Singapore banks.

Singapore Research RHB Securities | http://www.rhbgroub.com/ 2015-11-03

RHB Securities SGX Stock Analyst Report BUY Maintain BUY 21.10 Same 21.10