DBS GROUP HOLDINGS LTD
D05.SI
DBS Group - Soft outlook real, but market prices in a crisis
- 4Q net profit (S$1,001m) was within our expectations (S$973m) and the Street’s (S$1,040m). A flat NPL and limited flare-up in allowances are likely to stoke relief.
- NII was +2% qoq as NIMs +6bp to compensate for a 0.7% contraction in the loan book. The contraction was all trade loans; non-trade loans grew 2% qoq.
- Fees and trading was decent. Cost was controlled. DBS has the largest exposure to oil and gas, but was able to recoup loan values on a foreclosure in 4Q.
- Maintain Add but with lower target price (1.05x CY16 P/BV) as we trim EPS by 3% (S$18.26).
■ Net interest income 2% higher qoq, trade loan book shrinks
- Margins expanded 6bps as Singapore loans continued to be re-priced, but the loan book shrank 0.7% qoq as a decline in trade loans was partially offset by growth in corporate and housing loans.
- In the past 18 months, DBS’s Greater China trade book has shrunk 41% and its China exposure is now increasingly non-trade (43% of China loans).
■ Seasonally weak quarter for non-interest income, as expected…
- Fee income (-6% qoq) was weaker-than-expected on weak broking, loan-related and wealth management fees. This was compensated by a stronger-than-expected trading quarter.
- Total income (-2% qoq) was ahead of expectations on a good trading quarter. 4Q expenses (-1% qoq) was also controlled.
■ Specific allowances lower qoq, NPL ratio flat
- Asset quality hogs all the attention. New NPAs (4Q: S$662m, 3Q: S$339m) rose on two chunky accounts, but 4Q’s rate of recoveries was surprisingly high (DBS foreclosed on the two clients) and NPL (0.9%) was flat. SP (18bp of loans) was slightly lower qoq and GP (9bp), slightly higher.
- FY15 net SPs differed from FY14 only on the level of writebacks. DBS expects a 25% increase in FY16 SPs (S$750m, total provisioning 30-35bp).
■ Management arguing for a case of limited new oil and gas SPs
- DBS’s oil and gas exposure is S$22bn (7.7%) of the loan book, of which $9bn is in upstream support services.
- CEO Piyush Gupta argued that DBS does not expect to see materially higher SPs in the oil and gas upstream space, despite the relatively low 1.3% NPL right now. This is because Its oil and gas loans are still at 50-60% LTVs vs. the collaterals’ latest appraised values and it has shown that it can recoup collateral in 4Q.
■ Commodities, Greater China are other risks
- Other commodities make up another S$12bn (4.2%) of the loan book, with the exposure 75%-skewed to traders. Its NPL of 1.7% is from accounts in gold and iron products.
- On the China book, a low NPL (0.6%) is due to the bulk of the book being trade or SOE loans.
- DBS did take S$72m (10bp) of non-loan provisioning in 4Q though, on hedging positions that might sour on RMB weakness. These risks will expire in three months.
■ Capital ratios look solid, and that makes valuations look cheap
- We view valuations at 0.8x CY16 P/BV as attractive.
- While oil and gas risks are real and could haunt in 2017-18, current valuations have penalised it more than necessary.
- With a fully-loaded CET1 ratio (12.4%), the highest among peers, a sufficient 148% coverage ratio and FY16 earnings growth from a bancassurance deal, we maintain an Add rating.
Kenneth NG CFA
CIMB Securities
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Jessalynn CHEN
CIMB Securities
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http://research.itradecimb.com/
2016-02-23
CIMB Securities
SGX Stock
Analyst Report
18.26
Down
19.58
