DBS Group Holdings - UOB Kay Hian 2016-07-26: 2Q16 Results Preview: Maintaining Positive Momentum

DBS Group Holdings - UOB Kay Hian 2016-07-26: 2Q16 Results Preview: Maintaining Positive Momentum DBS GROUP HOLDINGS LTD D05.SI 

DBS Group Holdings (DBS SP) - 2Q16 Results Preview: Maintaining Positive Momentum

  • We expect DBS to report a net profit of S$1,011m in 2Q16, a retracement of 16% qoq from the near record of S$1,203m in 1Q16. 
  • DBS has done well to maintain NIM, generate yoy growth in fees and preserve stability in asset quality. 
  • DBS was recognised as the best digital bank in the world. Its digital transformation would improve customer experience, enhance productivity of marketing efforts and fend off potential incursion by fintechs. 
  • Maintain BUY. Target price: S$19.30.



WHAT’S NEW


Results preview for 2Q16. 

  • We expect loans to have reversed from a contraction in 1Q16 to expansion in 2Q16. DBS gained market share in housing loans and benefitted from loans to support corporate activities, such as M&As and privatisation. We see trade loans stabilising in 2Q16, unlike the contraction of S$6b qoq in 1Q16. DBS should see a pick-up in loan growth in 2H16 and is on track to see mid-single digit loan growth for 2016.
  • Net interest margin (NIM) is expected to be stable at about 1.85% despite the huge retracement in SIBOR and SOR as DBS was able to manage its cost of deposits.
  • Fees have expanded with growth from investment banking (IPO for ManuLife US REIT and Frasers Logistics & Industrial Trust) and cards (Great Singapore Sale). Contribution from wealth management is expected to be flat qoq due to continued risk aversion and on-going volatility in financial markets. Net trading income has receded qoq as 1Q16 is usually a high base for treasury activities.
  • We do not expect much deterioration in asset quality with NPL ratio relatively unchanged at about 1%. Management has maintained guidance on specific provisions at 25bp. Nevertheless, the oil and gas sector remains under pressure. Crude oil prices must sustain at a higher level for a longer period of time before any meaningful recovery in upstream exploration activities.
  • We forecast net profit at S$1,011m for 2Q16, receding 16% qoq from a near historical record of S$1,203m achieved in 1Q16 and down 9.5% yoy from S$1,117m in 2Q15.

The digital warrior. 

  • DBS was recognised as the best digital bank in the world by Euromoney Awards for Excellence, ahead of BBVA, Citi and ING.
  • DBS has the largest base of 2.5m iBanking customers and 1.25m mBanking customers in Singapore. 38% of credit card customers signed up through digital channels. In wealth management, high net worth customers could transact in foreign exchange and purchase unit trusts through digital channels. Management also intends to utilise data analytics to improve the effectiveness of its marketing campaigns.
  • Corporate customers could check pricing and transact foreign exchange, swaps, forwards and non-deliverable forward contracts through online platform DealOnline. In Singapore, SME customers can apply for 11 types of loans and track the progress of their application in real-time. In Hong Kong, SME customers are able to apply for loans through a mobile app and receive in-principle approval in an hour.
  • DBS launched the first mobile-only digibank in India in Apr 16. Digibank is branchless and paperless and leverages on biometrics and artificial intelligence to improve customer experience. Management targets to launch another digibank in Indonesia by end-16.



STOCK IMPACT


Resilient despite a difficult operating environment. 

  • We expect DBS to maintain profitability despite the difficult operating environment in 2Q16.

Anticipate recovery in trade loans in 2H16. 

  • DBS was affected by lower US dollar- denominated lending, which contracted 11.3% yoy in 1Q16. 
  • Demand for trade loans has fallen due to the narrowing of the interest rate differential between onshore and offshore renminbi. The spread was negative in 4Q15 and 1Q16 but has normalised back to positive since mid-Mar 16, which augurs well for a recovery in trade loans in 2H16.


EARNINGS REVISION/RISK

  • We maintain our existing earnings forecast.


VALUATION/RECOMMENDATION

  • Maintain BUY. 
  • Our target price of S$19.30 is based on 2016F 1.14x P/B, derived from the Gordon Growth Model (ROE: 9.4%, COE: 8.3%, beta: 1.1x, growth: 0.5%).


SHARE PRICE CATALYST

  • Developed markets, such as Singapore and Hong Kong, accounted for 84% of DBS’ total income in 1Q16. Thus, DBS is less susceptible should there be capital outflow from this region after the US Fed hikes interest rates.
  • DBS is a leading player in offshore renminbi in Hong Kong. It is well positioned to benefit should there be a recovery in renminbi-denominated trade finance facilities.



Jonathan Koh CFA UOB Kay Hian | http://research.uobkayhian.com/ 2016-07-26
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 19.30 Same 19.30


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