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DBS - RHB Invest 2016-02-23: Management Confident On Asset Quality

DBS - RHB Invest 2016-02-23: 4Q15 Results Within Expectations DBS GROUP HOLDINGS LTD D05.SI 

DBS - Management Confident On Asset Quality 


4Q15 Results Within Expectations


■ Core earnings up 12% YoY in FY15 but fell 6% QoQ in 4Q15 

  • DBS’ FY15 results were broadly in line with our and consensus expectations. 
  • Core net profit grew 12% YoY on a 6bps YoY expansion in NIM, 3% YoY loan growth and broadbased increase in non-interest income. 
  • For 4Q15, net profit declined 6% QoQ mainly due to a: 
    1. 12% QoQ drop in non-interest income (lower brokerage, loan-related activities and wealth management fees) and there was a SGD43m gain from sale of properties in Hong Kong in 3Q15, and 
    2. a 39% QoQ increase in impairment allowances as general allowances (GP) increased 91% QoQ while specific allowances (SPs) for other assets was SGD54m vs. SGD1.0m in 3Q15. 
  • Key positives include: 
    1. NIM expansion of 6bps QoQ on the back of rising SGD interest rates, 
    2. manageable 5.7% QoQ increase in gross NPLs with loan loss coverage at a comfortable 137.1%, and 
    3. fully-loaded common equity tier-1 ratio improving to 12.4% (Sep 2015: 11.9%). 

■ Asset quality remains resilient 

  • Gross NPLs rose 6% QoQ in 4Q15, with the increase coming mainly from two large accounts – a fisheries company in Hong Kong and an offshore marine firm in Singapore. 
  • No specific provisions were required as these two accounts are well collateralised. 
  • Gross NPL ratio ticked up to 0.91% (Sep 2015: 0.86%) but loan loss coverage declined to 137.1% (Sep 2015: 145.4%). 
  • Loan credit cost was 18bps in 4Q15 (3Q15: 20 bps) and 19bps in FY15 (FY14: 18bps). 


■ Key Highlights From The Management Briefing 


Expects 25% rise in SPs in 2016, SP credit cost of 25bps 

  • Management is budgeting for a 25% increase in SPs this year to about SGD750m. This takes into account expected deterioration in its China loans and the non-oil & gas exposure. 
  • Improvements in the Indian and Indonesian books are likely to provide some cushion. The expected rise in SPs would raise SP credit cost to 25bps from 19bps in FY15. 
  • Key risks to management’s forecast would be a sharp devaluation of the CNY over the next three months and large corporate blow-ups. 

Do not foresee additional specific provisions for oil & gas in 2016 

  • DBS’ oil & gas exposure amounted to SGD22bn as at end-Dec 2015. The bank’s producers, traders and processors portfolio, which accounts for SGD130bn, or 59% of total exposure, is not under stress with zero NPL currently. 
  • Approximately 71% of this portfolio consists of short-term loans and 46% are trade loans. The support services portfolio (SGD9bn, or 41% of total exposures) has a NPL ratio of 1.3%. 
  • Management stress-tested its oil & gas exposures at USD20 per bbl and is confident there be no additional SPs in 2016. But should oil prices stay at around the USD20 per bbl mark throughout 2017-2018, losses would be expected but SP would likely be limited to SGD150m-200m (c.7bps of loans). 
  • Average exposure in the oil & gas segment is SGD500m-600m with 65% of exposures collateralised with loan to value (LTV) of 50-60%. Management expects minimal SPs in 2016 from this portfolio. 
  • DBS has also demonstrated good ability to work with clients to sell their vessels at prices that comfortably cover the loans outstanding. 

Seeing some stress in coal and steel exposures 

  • Non-oil & gas commodities exposure stood at SGD12.0bn at end-Dec 2015, of which 79% are short-term loans and 41% are trade loans. 
  • NPL ratio was a higher 1.7%. 
  • Management is seeing some stress in the bank’s coal and steel exposures, which totals around SGD2.5bn. It has budgeted for expected losses from the non-oil & gas commodities portfolio. 

■ Expects losses from China exposure to be small 

  • DBS’ has been gradually reducing its China portfolio. Of the total exposure of SGD37bn as at end-Dec 2015, 57% were trade loans that were mostly bank-backed. 
  • Non-trade loans of SGD16bn are made up of loans to Chinese companies (c.SGD10bn-11bn) and foreign companies with operations in China (c.SGD6bn-7bn). 
  • In 4Q15, DBS classified SGD70m of out-of-money hedged position after the USD/CNY appreciated to 6.60 from 6.30. 
  • These CNY positions could deteriorate further should there be a sharp devaluation of the CNY in the next three months. Management highlights the possibility of further credit losses of SGD150m-200m. 

■ Earnings Forecasts 

  • We lowered our net profit projections by 7% for FY16 and 8.5% for FY17, mainly due to softer loan growth assumptions, lower growth in non-interest income and higher loan credit cost of 32bps (from 26bps) for FY16 and 29 bps (from 23 bps) for FY17. 

■ Valuation 

  • We lower our GGM-derived TP down to SGD16.70 from SGD21.10 after taking into account the higher cost of equity (10.5% from 9.75%), lower long term growth (3% vs 3.5%) and lower sustainable ROE (10.5% from 11.4%). 
  • The revised GGM assumption takes into account the more challenging operating environment and the asset quality risks. 
  • At SGD16.70, implied FY16F P/BV is 1x (-1SD historical mean: 0.96x) and FY16F P/E would be 9.6x, or -1SD to its historical mean of 9x.



Singapore Research RHB Invest | http://www.rhbgroub.com/ 2016-02-23
RHB Invest SGX Stock Analyst Report BUY Maintain BUY 16.70 Down 21.10


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