DBS GROUP HOLDINGS LTD
D05.SI
DBS Group - Positioned to capture China flows
- Biggest exposure to Greater China among Singapore banks, translating to slower trade finance loans in the short term, but a beneficiary of OBOR in the long term.
- We expect the Manulife bancassurance deal to prop up fees in 2016, while the loosening of capital controls in China could lead to demand for wealth services.
- NPLs from the oil & gas services sector a concern; it is the only bank that has yet to recognise NPLs in this segment despite having the biggest exposure.
- Maintain Add, with a GGM-based target price of S$19.58 (1.16x CY16 P/BV).
■ Fees to be propped up by Manulife deal near term
- In an environment where capital markets-related fees (investment banking, stockbroking, wealth management), trade fees and loan fees are slowing across the banks, DBS has the added engine of a bancassurance deal with Manulife, which will add c.S$100m per year in fixed payments to its fee income starting 2016 (c.5% of 2015 fee income).
■ Beneficiary of China wealth flows and OBOR in the longer term
- Among the Singapore banks, DBS has the biggest exposure to Greater China at 35% of loans (OCBC: 28%, UOB: 12%) and 31% of PBT (OCBC: 20%, UOB, 10%) as at 9M15. We think this will make it a key beneficiary of China’s One Belt, One Road (OBOR) policy.
- As China loosens its capital controls and allows for more foreign investments, we think DBS can also tap the increased demand for wealth management (WM) services.
- Since its acquisition of SocGen, DBS now has the largest WM AUM at S$103bn.
■ Loan growth to slow but NIM should compensate
- As onshore and offshore rates in China converge, demand for trade loans continues to taper along with the arbitrage opportunity, dragging down overall loan growth.
- However, offsetting this is the potential pickup in NIMs with a Fed rate hike, which should improve customer loan spreads on US$ and S$ non-trade loans. That said, the impact of higher US rates on NIMs will be less pronounced than the recent SIBOR hike, as DBS depends more on expensive fixed deposits for US$ funding (US$ CASA: 42%, S$ CASA: 90%).
■ Look out for NPLs from oil & gas
- Our biggest concern for DBS remains its exposure to small- and mid-cap oil & gas services firms. While OCBC and UOB have started to recognise NPLs for some oil & gas names, DBS has yet to do so despite having the biggest exposure to the oil & gas sector at 8% of loans (OCBC: 6%, UOB: 5%).
- We expect DBS’s credit costs to rise to 40bp in 2016 (up from 25bp in 3Q15), between OCBC’s 38bp and UOB’s 65bp.
■ Maintain Add
- At its current valuation of 1.0x CY16 P/BV, the market has already priced in slowing loan growth, lower fees and higher credit costs, in our view.
- Even assuming higher credit costs of 40bp in 2016 (vs. 25bp in 3Q15), we are confident that DBS is able to achieve ROEs that exceed cost of equity, which should limit share price downside from here.
Kenneth NG CFA
CIMB Securities
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Jessalynn CHEN
CIMB Securities
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http://research.itradecimb.com/
2015-12-09
CIMB Securities
SGX Stock
Analyst Report
19.58
Same
19.58
