DBS Group - CIMB Research 2016-08-08: ROE dented by one Swiber case

DBS GROUP HOLDINGS LTD D05.SI

DBS Group - ROE dented by one Swiber case

2Q16 net profit in line. 1H formed 50%/52% of our/consensus full-year forecast.
Topline was resilient, with DBS the only bank to see NIM expansion qoq on better liquidity management. Loan growth was strong at 4% qoq. IB fees did well.
Provisions doubled qoq on SPs for Swiber. Excluding Swiber, new NPA formation was manageable. Weakness in steel, coal, China, Indo, Swiber-related names.

Downgrade to Hold. We cut our FY16-18F EPS by 6-14% on expectations of higher provisions for oil & gas and lower NIM. Our GGM target price falls to S$15.31.

2Q16 core net profit of S$1,051m (-10% qoq, -6% yoy) was a decent showing despite the S$150m in net provisions taken for its Swiber exposure, which more than doubled total provisions qoq to S$366m.
Topline was resilient, with NII flat qoq as NIM rose 2bp to 1.87% and loans grew 4% qoq.
DBS was the only bank to achieve this in the face of falling SIBOR/SOR given better liquidity management.
Non-NII grew 5% qoq on higher IB fees (+277%), trade fees (+4%) and net income from investment securities (+35%).

Loan growth guidance was kept at mid single-digit for FY16, with NIM to come off 3-5bp from current levels.
Management explained that average loan balances in 2Q were impacted by unfavourable exchange rates earlier in the year, but should improve in 3Q and help prop up NII as NIM comes off.
We think fee income could be weaker in 2H as IB fees appear unsustainable, while provisions could increase from contagion of Swiber- linked names.
CIR guidance was at 44-45%; we think it could come in at the higher end.

DBS’s exposure to Swiber was S$651m in Jun, but increased to S$721m in Jul. S$403m relates to working capital loans for two projects, S$121m secured term loans for a vessel/property, and S$197m bridging loans for bond redemptions in Jun-Jul.
As DBS has only made S$650m provisions for its exposure as at 2Q16, we expect another S$70m in 3Q.
Management’s take is that the best case scenario is for the two projects to be completed (now 50% and 80% completed), which will allow it to recognise recoveries.

DBS’s exposure to offshore support services fell to S$7bn (4Q15: S$9bn). S$2bn is to government linked shipyards, S$2.3bn is chunky exposure to five names (one has weakness), S$2.7bn is smaller exposure to 90 names (1/3 showing weakness, mainly Swiber-related). LTVs are now at 70-80%.
NPL ratio of the entire oil & gas portfolio is 1- 2%, translating to 3-6% NPL ratio for offshore support services (OCBC: 15%). Other stress areas include steel and coal (S$3bn exposure), China SME and Indonesia.

This quarter showed the impact of higher provisions on ROE, which fell to 10.1% (1Q16: 11.9%). We think DBS could lag behind its peers on recognition of NPLs and provisions, especially for the oil & gas sector, and expect it to play catch-up in FY17-18 if the industry conditions remain weak.
We slash our FY16-18F EPS by 6-14% for higher provisions, and our GGM-based target price falls to S$15.31. Upside/downside risks could stem from better/worse asset quality than expected.

Jessalynn CHEN CIMB Research | http://research.itradecimb.com/ 2016-08-08

CIMB Research SGX Stock Analyst Report HOLD Downgrade ADD 15.31 Down 17.960