DBS Group - Maybank Kim Eng 2016-05-04: Near-term headwinds

DBS GROUP HOLDINGS LTD D05.SI

DBS Group (DBS SP) - Near-term headwinds

Core PATMI of SGD1,203m (+20% QoQ, +6% YoY) beat expectations due to
1. higher non-interest income, and
2. lower provisions as no GPs were made this quarter.
Similar to peers, DBS’s results reflect slowing growth.

Loans fell 1% QoQ and YoY in constant currency terms, mainly due to trade loans (-5% QoQ, -11% YoY).
NIMs at 1.85% (+1bps QoQ, +16bps YoY) from
1. loan repricing of higher Singapore interest rates,
2. irun-off of lower-yielding China trade-related loans and replacing with higher yielding export-import trade loans.
Non-interest income beat on nonrecurring net gains of SGD38m.
Management guided NIM at ~1.8% and 2016E loan growth at 2-3%. It expects China trade loans to continue to fall in 2Q16 and level off in 2H16.
We adjust FY16-18E net profit by 1-2% accordingly.
Maintain SELL with higher TP SGD13.40 on 0.8x FY16 P/BV, close to 1.5SD below historical mean to reflect lower ROEs going forward.

DBS has the highest fully loaded CET1 among peers, +80bps QoQ to 13.2%.
RWA fell 2% QoQ due to currency effects and declining loans. Management shared that combined impact for Basel 3.5 (i.e. recent announced rules on Counterparty Credit Risk and Fundamental Review of the Trading Book) is 10% of RWAs and will impact 80-90bps of capital. It remains confident in reducing trading book considerably.

Group NPL rose to 1.0% from 0.9% last quarter.
Provision coverage fell to 134% (4Q15: 148%, 1Q15: 161%). No new NPAs came from O&G portfolio this quarter and mgmt sees no weakness, in contrast to OCBC’s cautious guidance.
New NPAs of SGD607m stemmed from broad-based increase, steel manufacturer in India and hedging exposures for RMB.
Specific provisions in South/SEA and HK rose +21% and +44% QoQ respectively.
NPAs continued to move to more serious categories and restructured NPAs rose 72% QoQ, 14% YoY.

Stock has bounced back, now trading ~1x P/BV, close to 1SD below 10-yr mean.
Catalysts:
1. stable market environment,
2. ability to reprice,
3. RWA optimisation.

Ability to reprice loans at higher interest rates and lower costs of funding, from large pool of CASA deposits.
Higher non-interest income from wealth-management and Manulife bancassurance businesses.
Sharp and sustained rebound in commodity prices.
Asset quality better than expected with no major credit slippages and proactive loan restructuring.
Higher demand for domestic mortgages from easing of cooling measures.
Translation benefits from appreciation of USD/HKD.

Highest asset-quality risks from exposure to North and South Asia and O&G sector.
Sharp decline in the value of securities and shocks in fixed-income portfolio.
Job losses in Singapore become pervasive, hurting mortgage portfolio.
Lack of liquidity of a funding currency.
Emergence of dominant financial competitor in Singapore.
Capital-raising by peers.

Ng Li Hiang Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-05-04

Maybank Kim Eng SGX Stock Analyst Report SELL Maintain SELL 13.40 Up 12.68