DBS - RHB Invest 2016-07-13: To Ride On A Firmer SIBOR

DBS - RHB Invest 2016-07-13: To Ride On A Firmer SIBOR DBS GROUP HOLDINGS LTD D05.SI 

DBS - To Ride On A Firmer SIBOR

  • Whilst Brexit may slow global economic growth, we believe the US Fed Fund rate could see one hike this year. DBS’ NIM would widen most from a rate hike scenario. 
  • Despite our cutting of DBS’ 2016 loan growth assumption to -1.5% YoY (from +2.5%), and factoring in mild deterioration of asset quality, we maintain BUY. 
  • Although we cut 2016 and 2017 earnings forecast by 4% and 6% respectively, our GGM-derived TP is unchanged at SGD17.30. (10% upside), with SIBOR increases being a key catalyst. 
  • Including c.4% dividend yield, total return could be c.13%.

DBS’ NIM to widen most if SIBOR rises. 

  • Management guided for 1.81-1.82% net interest margin (NIM) for 2016, versus 1Q16’s 1.85%. 
  • With the sharp contraction in low-margin trade loans, we are forecasting 2016 NIM of 1.86%. If the Fed Fund rate rises and Singapore interbank offered rate (SIBOR) does likewise, DBS will gain most amongst its peers – its SGD current account, savings account (CASA) account for a large 91% of total SGD deposits, and this will minimise interest expense rise whilst loan yield rises with SIBOR increase. 
  • We forecast 2017 NIM of 1.96%, driven by SIBOR increase – our economists are forecasting 3-month SIBOR of 1.15% and 1.4% for end-2016 and end-2017 respectively (versus current 0.93%). 
  • Our sensitivity analysis shows that in steady state, a 10 bps rise in SIBOR could raise DBS FY17F net profit by 1.6%.

Asset quality deterioration seen to be gradual. 

  • DBS management, during the 1Q16 results briefing, indicated that the oil and gas (O&G) loans exposure remained stable. The recovery in oil price should have helped stabilise this portfolio. 
  • We see marginal QoQ rise in 2Q16 NPL ratio (from 1Q16’s 1.0%), and further rise to 1.6% by end-2017. Our 2016 credit cost assumption is 32bps (higher than 2015’s 26bps). 
  • Moody’s downgrading of Singapore banks’ outlook recently supports our expectations of deteriorating asset quality.

Expecting 2016 loan contraction. 

  • Management is guiding low single-digit constant currency loan growth for 2016, whilst 1Q16 loan was down 2.0% QoQ (due to sharp fall in trade loans). In light of the weakening Singapore systemic loan growth of -1.2% YTD for end-May 2016 (although there was a MoM rise of 0.5%), we have lowered our 2016 DBS loan growth forecast to -1.5% YoY (from 2.5% previously). 
  • Our 2017 loan growth forecast is also an unexciting 3.0% YoY. We view the reduced exposure to China trade loans a positive (for asset quality) in the current environment of slower China economic growth.

Attractive valuation. 

  • We lowered our 2016 and 2017 net profit forecasts by 4% and 6% respectively, on reduced non-interest income (2016) and higher provisions (2017). 
  • Our GGM-derived TP is maintained at SGD17.30. 
  • Key assumptions are 10% cost of equity and 10.1% ROE. Our TP gives a 2016 P/B of 1.0x (5-yr historical mean of 1.07x), and 2016 P/E of 10.5x (5-yr historical mean of 9.6x). 
  • Maintain BUY. This report marks the transfer of coverage to Leng Seng Choon.

Leng Seng Choon CFA RHB Invest | http://www.rhbinvest.com.sg/ 2016-07-13
RHB Invest SGX Stock Analyst Report BUY Maintain BUY 17.30 Same 17.30