DBS Group Holdings - UOB Kay Hian 2016-02-23: 4Q15: Balance Sheet More Resilient

DBS Group Holdings - UOB Kay Hian 2016-02-23: 4Q15: Balance Sheet More Resilient DBS GROUP HOLDINGS LTD D05.SI 

DBS Group Holdings (DBS SP) 4Q15: Balance Sheet More Resilient 

  • DBS’ 4Q15 results were slightly above expectations. 
  • Management provided more details on DBS’ exposure to the O&G sector. 
  • 80% of loans extended to the riskier offshore support services are collateralised. 
  • Stress test revealed that specific provisions are unlikely to exceed S$200m if prices of crude oil stay at US$20/bbl over the next two years. 
  • Maintain BUY. Target price: S$17.48. 


RESULTS 

  • DBS Group Holdings (DBS) reported 4Q15 net profit of S$1,002m, slightly above our expectation of S$980m. 

 NIM expansion continues. 

  • Loans contracted 0.7% qoq and were up only 2.8% yoy. Net interest margin (NIM) expanded by 6bp to 1.78% due to higher SIBOR and SOR in Singapore and a shift from trade loans to corporate loans. 
  • Fees dropped 1.5% qoq due to weakness in brokerage (-24% qoq), loans-related fees (- 27% qoq) and wealth management (-12% qoq). On a yoy basis, fees were up 10.1%. 
  • Net trading income was strong at S$289m due to higher treasury customer flows. 

 New NPLs mainly from Hong Kong and China. 

  • NPL ratio remained unchanged at 0.9%. NPLs increased by S$141m or 5.7% qoq due to deterioration in Hong Kong and Greater China. DBS recognised two NPLs in 4Q15, one from a fishery company in Hong Kong and the other from an Offshore & Marine company in Singapore. 

 Cushioning from surplus general provisions. 

  • Loan loss coverage remained healthy at 137.1%. DBS has surplus general provisions of S$600m, which could be utilised to absorb additional specific provisions without affecting its CET-1 CAR. 

 Most well capitalised. 

  • DBS' fully loaded CET-1 CAR is 12.4% as of Dec 15, higher than both OCBC’s and UOB’s. Its risk density (risk-weighted assets/total assets) at 60% is among the highest in the world. This means that DBS would be less affected by the Basel 3.5 changes to the Standardised Approach for measuring Counterparty Credit Risk (SACCR) and Fundamental Review of the Trading Book (FRTB). 
  • DBS has declared a final dividend of 30 S cents/share. Scrip dividend scheme applies to the final dividend. The issue price for new shares would be the average closing prices on 5, 6 and 9 May. 


ESSENTIALS – HIGHLIGHTS FROM RESULTS BRIEFING 


 Guidance for 2016. 

  • Loan growth is estimated at a low single-digit of 2-3% for 2016. Net interest income is expected to expand 5-6% with the pick-up in NIM. 
  • Non-interest income is expected to increase 7-8%. There will be contributions from the bancassurance deal from ManuLife. 
  • Management expects specific provisions to increase from 20bp in 2015 to 25bp in 2016. 

 Exposure to O&G. 

  • Loans extended to the Oil & Gas (O&G) sector totalled S$17b. Including contingent liabilities, total exposure to the O&G sector would be S$22b. 
  • DBS disclosed that loans for offshore support services remained unchanged at S$7b (total exposure at S$9b). There are 10-12 customers within this space and average loan quantum is S$500-600m (mostly larger corporations) and 80% of these loans are secured by collaterals. The average LTV ratio is 50-60% based from the latest appraised valuation for the collaterals. NPL ratio for offshore support services is 1.3% and management expects minimal specific provisions in 2016. 
  • DBS has stress tested its O&G portfolio for prices of crude oil at US$20/bbl over the next two years. Management does not expect credit costs/specific provisions to exceed S$200m under this extreme scenario. Most customers have cash holdings and positive cash flow to service their debt obligations in 2016. 

 Exposure to China. 

  • Loans to China were reduced by 14% or S$6b qoq to S$37b. Trade loans contracted by 19% qoq while corporate loans contracted by 6% qoq. Current NPL ratio for China is low at 0.6%. 


STOCK IMPACT 

  • DBS’ 4Q15 results were slightly above expectations. 
  • We believe current share prices of banks have already imputed a crisis of severity similar to the Global Financial Crisis. We maintain our BUY call as downside could be limited. 


EARNINGS REVISION/RISK 

  • We have kept our net profit forecasts for 2016 and 2017 relatively unchanged. 


VALUATION/RECOMMENDATION 


Maintain BUY. 

  • Our target price for DBS of S$17.48 is based on 1.06x P/B, which is derived from the Gordon Growth Model (ROE: 8.3% (average of 2016F, 2017F and 2018F), COE: 7.8% and Growth: 0.0%). 


SHARE PRICE CATALYST 

  • DBS focuses on its nine strategic priorities to grow organically. Growth drivers include regional businesses such as global transaction services, wealth management and SMEs. 
  • Growth from overseas markets, such as China, Hong Kong, India, Indonesia and Taiwan. 




Jonathan Koh CFA UOB Kay Hian | http://research.uobkayhian.com/ 2016-02-23
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 17.48 Down 17.80


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