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

DBS GROUP HOLDINGS LTD D05.SI

DBS - Management Confident On Asset Quality

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%).

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).

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.

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.

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.

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.

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.

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

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