DBS Group - CIMB Research 2016-01-28: Still growing amid fall in China trade finance

DBS GROUP HOLDINGS LTD D05.SI

DBS Group - Still growing amid fall in China trade finance

We met with John Laurens, head of DBS Global Transaction Services (GTS).
DBS’s trade book to bottom out in 1H16 as growth in open account trade (OAT) offsets the decline in traditional LC-backed trade finance (EBLC).
Aims to be among the top 3 in transaction banking by growing its cash management business, which currently lags behind its trade business.

We attended a session for sell-side analysts hosted by John Laurens, Group Head of GTS at DBS. GTS consists of four key pillars:
1. documentary trade, which provides traditional trade financing for export bills under LC (EBLC),
2. open account trade (OAT), which provides supply chain and import/export financing for corporate clients,
3. cash management, and
4. securities and fiduciary services.
GTS accounted for 36% of preprovision operating profit (PPOP) in 9M15, double the 18% in 2010.

DBS’s trade book has been on a consistent decline, shrinking from S$62bn in 2Q14 to S$53bn in 3Q15.
Specifically, its China trade loans fell from S$36bn to S$26bn, largely due to a decline in offshore RMB EBLC funding. This was driven by:
1. lower demand given the narrowing of the interest rate arbitrage gap between CNH and CNY, and
2. fall in the value of trade loans amidst lower commodity prices.
As a result, the proportion of RMB arbitrage trade to total trade income fell from 33% in 2014 to 21% in 2015.

Amidst falling demand for EBLC, DBS has grown its OAT business to provide direct import/export financing and supply chain financing solutions to its corporate clients.
The proportion of trade loans from OAT increased from 43% in 2Q14 to c.50% in 3Q15.
DBS expects its overall trade volumes to bottom out in 1H16, as growth in OAT offsets the decline in EBLC loans.

We see room for margin improvement in DBS’s trade book, driven by better funding mix and the shift from lower-margin EBLC to higher-margin OAT loans. DBS has proactively managed its expensive FDs and grown its GTS CASA proportion from 41% to 50% over 3Q14-3Q15, with the help of its cash management business.
EBLC loans continue to come under margin pressure, with average loan spreads of 50-100bp, but should be offset by the growth in OAT loans, which command an average loan spread of 170bp.

DBS plans to invest S$60m in 2016-17 to offer new solutions and grow its cash management business.
Cash currently accounts for c.50% of DBS’s GTS business vs. the market average of 70-80%; it aims to increase its cash proportion closer to its peers by leveraging its strength in trade to cross-sell into cash management and become one of the top three players in transaction banking (currently 6th).

Kenneth NG CFA CIMB Securities | Jessalynn CHEN CIMB Securities | http://research.itradecimb.com/ 2016-01-28

CIMB Securities SGX Stock Analyst Report ADD Maintain ADD 19.58 Same 19.58