DBS GROUP HOLDINGS LTD
D05.SI
DBS Group Holdings (DBS SP) 1Q16 Results Preview: Moderate Impact From Market Turmoil; Resilient Asset Quality
- We expect DBS to record 1Q16 net profit of S$1,003m despite the tough operating environment.
- The bank should benefit from yoy NIM expansion and maiden contribution from the bancassurance partnership with ManuLife.
- Investors should be relieved as there is no material deterioration in asset quality.
- Maintain BUY. Target price: S$19.25.
WHAT’S NEW
Preview for 1Q16.
- We expect DBS to record a net profit of S$1,003m for 1Q16, flat qoq but down 21% yoy (down by a smaller 11.5% yoy if we exclude one-off gain of S$136m from the disposal of property in Hong Kong in 1Q15).
Loans could have contracted slightly qoq.
- There should be growth from corporate loans and Singapore housing loans. However, trade loans continued to decline and US$ loans were affected by the strength of the S$.
- NIM could have maintained at the lucrative 1.84% seen in 4Q15 despite the steep correction in the S$ swap offer rate (SOR).
Fees are expected to have expanded qoq from a low base but yoy growth could be muted.
- Contributions from market-sensitive sources, such as brokerage and investment banking, were affected by turmoil in the financial markets.
- Wealth management did well due to the bancassurance partnership with ManuLife (accrual of upfront fee: S$26.5m/quarter).
- There should also be positive contribution from credit cards. Net trading income should be quite muted.
- NPL ratio could have crept up slightly, given the slowdown in economic growth on a regional basis, but specific provisions were expected to be in line with management’s guidance of 25bp.
Positive guidance for 2016.
- Management guided loan growth of 2-3% for 2016, driven by corporate actions, such as M&A and privatisations, and housing loans.
- Net interest income is expected to expand 5-6% with a higher NIM. Non-interest income is expected to increase 7-8%, boosted by contribution from the bancassurance partnership with ManuLife.
- Total income should expand 7-8%.
Cost-to-income ratio to maintain at 45%.
- Management expects specific provisions to increase from 19bp in 2015 (S$551m) to 25bp in 2016 (S$750m), at the low-end of the long-term average of 25-30bp.
Expanding market share in housing loans.
- Management plans to expand its market share of 26% in housing loans by winning new customers through refinancing.
- DBS pioneered housing loans pegged to Fixed Deposit Home Rate (FHR), its 18-month fixed deposit interest rate. The new product is popular as FHR is less volatile than SIBOR.
- DBS is able to offer the innovative product due to its competitive advantage in a high CASA ratio of 91.9% for S$, which provides a sticky and low-cost deposit base.
Exposure to oil & gas.
- Loans extended to the oil & gas (O&G) sector totalled S$17b as of Dec 15.
- DBS disclosed that loans for the offshore support services segment were unchanged at S$7b. There are 10-12 customers within this space and the average loan quantum is S$500m-600m (mostly larger corporations) and 80% of these loans are secured by collaterals.
- DBS has stress tested its O&G loans on crude oil price at US$20/bbl over the next two years. Management does not expect 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.
Most well-capitalised.
- DBS's fully loaded CET-1 CAR was 12.4% as of Dec 15, higher than OCBC’s 11.8% and UOB’s 11.7%.
- DBS’s risk density (risk-weighted assets/total assets) at 59.9% is higher than OCBC’s 58% but lower than UOB’s 63.5%. Compared with many western banks, DBS would be less affected by the Basel 3.5 changes to the Standardised Approach for measuring Counter-party Credit Risk (SA-CCR) and Fundamental Review of the Trading Book (FRTB). Management estimated its risk-weighted assets would increase by 10% due to the impending regulatory changes although these are yet to be finalised.
- DBS has a scrip dividend scheme to strengthen its capital base. The issue price for new shares is set at the average of closing prices of the three consecutive trading days on and after the ex-dividend date.
- Unlike peers, DBS does not offer any discount in the price of new shares issued for scrip dividend.
STOCK IMPACT
- Demonstrating resiliency despite tough conditions. We expect DBS to maintain profitability despite the difficult operating environment in 1Q16.
- The stock should do well if there is no material deterioration to asset quality.
EARNINGS REVISION/RISK
- We maintain our earnings forecasts.
VALUATION/RECOMMENDATION
- Maintain BUY. Our target price is S$19.25, based on 1.14x P/B, derived from the Gordon Growth Model (ROE: 9.5%, COE: 8.3% (beta at 1.1x), growth: 0%).
SHARE PRICE CATALYST
- DBS focuses on its nine strategic priorities to grow organically. Growth drivers include regional businesses such as global transaction service, wealth management and SMEs.
- Developed markets, such as Singapore and Hong Kong, accounted for 83.5% of total income and 65.1% of loans in 4Q15. DBS has less exposure to emerging markets, which are more affected by lower commodity prices and normalisation of US interest rates.
Jonathan Koh CFA
UOB Kay Hian
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http://research.uobkayhian.com/
2016-04-20
UOB Kay Hian
SGX Stock
Analyst Report
19.25
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19.25
