DBS Group - Maybank Kim Eng 2016-02-23: Shades of Gray

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DBS GROUP HOLDINGS LTD D05.SI 

DBS Group (DBS SP) - Shades of Gray 

Headwinds ahead 

• 4Q15 results were robust and exceeded modestly. 
• Loan repricing and large base of CASA lifted NIMs to 1.77% (+9bps YoY). 
• RWA contracted 2% QoQ from SGD279b to SGD274b, restrained by trade loans. 
• Attaining management’s expectations of 7-8% income growth for FY16 looks challenging. 
• Filling the vacuum left behind from shrinking trade loans (- 9% QoQ) would be consumer/wholesale banking, which may require greater risk taking against global overcapacity and sluggish demand. 
• Recent sharp retracement has compressed valuation but capital markets remain distrustful and risk aversion is high. 
• Better visibility is prerequisite before confidence returns, in our opinion. 
• Maintain SELL with TP cut 21% to SGD12.68 after rolling forward our valuation to 0.75x FY16 P/BV, close to 2SD below the historical mean. 

The great disconnect 

• NPL stabilised at 0.9% during 2015 and management guidance calls for it to be restrained below 1.3% in 2016. 
• Based on DBS’s stress test at USD20/barrel oil, provisions should not exceed SGD200m. In contrast, O&G impairment for UOB and OCBC (mostly classified as transport assets) was 9.8% and 2.2%, respectively. 
• Notably, HSBC just posted its first quarterly loss in five years, and 2% of its O&G portfolio is impaired. 
• In reality, capital markets will remain concerned about asset quality and the adequacy of provisions, regardless of the amount of impairment charges taken and provided for, since these are notoriously dynamic and opaque. 

Highest CET1 among peers 

• DBS has the highest fully loaded CET1 among peers, which rose 50bps QoQ to 12.4% in 4Q15 largely due to lower market and credit RWAs. 
• With current levels not too far off from comfort levels of ~11%, DBS is likely to be cautious in its lending book. 

Trough valuation 

• DBS is now trading close to its trough valuation. 
• Our revised TP falls to SGD12.68 after rolling forward to 0.75x FY16 P/BV, close to 2SD below the historical mean. 
• While valuations are not demanding, numerous global banks are trading at less than 0.5-0.6x P/BV: Deutsche Bank 0.33x, Morgan Stanley 0.64x, Citibank 0.52x, Bank of America 0.51x, Barclays 0.49x, and Credit Suisse 0.56x.

Ng Li Hiang Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-02-23

Maybank Kim Eng SGX Stock Analyst Report SELL Downgrade SELL 12.68 Down 16.06