DBS GROUP HOLDINGS LTD
D05.SI
DBS Group Holdings (DBS SP) - 2Q16: Absorbing The Blow From Swiber
- DBS reported a net profit of S$1,051m despite a net charge of S$150m for Swiber.
- The deterioration in asset quality is manageable with NPL ratio rising marginally by 0.16ppt qoq to 1.13% (our estimation). The O&G sector remains under pressure and we have assumed that NPL ratio would deteriorate further by 0.5ppt to peak at 1.6% in 2Q17.
- Valuation is attractive with 2016F P/B at 0.89x (1SD below long-term mean) and dividend yield at 4%.
- Maintain BUY. Target price: S$19.15.
RESULTS
- DBS reported net profit of S$1,051m for 2Q16, above our forecast of S$882m.
Reversal from contraction to expansion.
- Loans expanded 3.9% qoq or S$10.7b qoq (1Q16: -3.2% qoq). Corporate loans grew S$5b qoq driven by deal-related financing and lending for commercial real estate and TMT. Trade loans also expanded S$3b qoq.
Benefitting from strong deposit franchise.
- NIM expanded 2bp qoq to 1.87% (OCBC : - 7bp qoq, UOB: -10bp qoq). DBS has reduced cost of deposits by 3bp qoq to 0.53%.
- We observed that DBS has trimmed fixed deposits in US dollar (-4.8% qoq), HK dollar (- 14.9% qoq) and renminbi (-33.3% qoq). CASA ratio improved by 1.7ppt qoq to 63.5%.
Sequential bounce from investment banking.
- Fees expanded 7.9% yoy (OCBC: -4.8% yoy, UOB: +2.2% yoy) and 9.4% qoq. Fees from investment banking grew 59.6% yoy due to IPO for ManuLife US REIT and Frasers Logistics & Industrial Trust.
- Contribution from Wealth Management was stable with growth in bancassurance offset by slower sale of investment products.
Net trading income was fairly robust at S$307m.
- Contribution from customer flows has increased from 50% to 54%.
Light hit on asset quality.
- NPL ratio deteriorated marginally by 0.1ppt qoq to 1.1%.
- NPLs increased by S$415m for Singapore (Swiber), S$125m for Hong Kong (renminbi derivative contracts) and S$85m for Indonesia (manufacturing and O&G).
- DBS recognised a net charge of S$150m for Swiber (specific provision of S$400m, writeback in surplus general provision of S$250m) in 2Q16.
Most well-capitalised bank.
- Its fully loaded CET-1 CAR of 13.4% showed an improvement of 0.2ppt qoq, and was the highest among the three Singapore banks.
- DBS declared an interim dividend of 30 S cents/share.
ESSENTIALS – HIGHLIGHTS FROM RESULTS BRIEFING
Predominantly financing working capital for Swiber.
- DBS has a longstanding 10-year relationship with Swiber, an integrated offshore contractor for shallow water O&G developments (lay pipes and build offshore platforms). Unlike DBS' typical exposure of secured lending for purchase of vessels, the exposure to Swiber was mainly financing of working capital for construction projects with life cycle of 2-3 years.
- The total exposure to Swiber was S$721m as of Jul 16, comprising loans of S$469m and other credit exposures of S$252m. The exposure of S$721m can also be broken down into:
- Working capital financing of S$403m for two projects, which are 50% and 80% completed, comprising trade finance and performance/warranty bonds,
- secured term loans of S$121m for purchase of vessels and property, and
- bridging loans of S$197m for bond redemptions in June and July.
Delay by AMTC triggered downward spiral.
- Swiber was not overdue in payment of interest and principal until June. It was highly leveraged but had plans to reduce gearing by bringing in private equity investor London-based AMTC. AMTC is said to have signed subscription agreement for preference shares of US$200m on 9 June. Swiber's management was confident that the cash infusion would materialise but it took longer than anticipated.
- Unfortunately, by then, the company has already utilised proceeds of S$156m from sale of a vessel in March (Swiber secured US$100m project in South Asia in March and US$215m projects from Qatar and Southeast Asia in June).
Best option to complete existing projects.
- Management expects recovery to exceed S$320m from the sale of collaterals, such as vessels and property, trade receivables for work done and expiry of warranty bonds. The value of collaterals is conservatively marked and is re-appraised every six months. The average LTV ratio has deteriorated from 50-60% to 70-80% over the past six months.
- Management's priority is to work with the judicial manager to ensure Swiber completes the two existing projects, so as to recover the S$403m.
Exposure to offshore support services is 90% secured.
- DBS has reduced its total exposure to the vulnerable offshore support services segment from S$9b to S$7b over the past six months (for loans, from S$7b to S$6b). It has S$2b exposure to government linked shipyards. The balance of S$5b is 90% secured (S$2.3b to five names, of which one account has shown weakness. Another S$2.7b to 90 names, of which one-third is deemed vulnerable).
- The O&G sector remains under pressure and is susceptible to contract cancellation.
STOCK IMPACT
- Management expects loan growth to pick up in 2H16 and maintains guidance of mid single-digit loan growth for 2016.
- The sudden hit from Swiber would have a negative impact on sentiment. Operationally, DBS has executed well and its NIM, fee income and net trading income (treasury activities) were spectacular despite an adversarial operating environment. We expect share price to gradually recover as valuation is attractive with P/B at 0.89x and dividend yield at 4%.
EARNINGS REVISION/RISK
- We raised our 2016 net profit forecast by 3.8% due to the better results in 2Q16. We maintain our earnings forecast for 2017 and 2018.
VALUATION/RECOMMENDATION
- Maintain BUY. Our target price for DBS of S$19.15 is based on 1.13x 2016F P/B, which is derived from the Gordon Growth Model (ROE: 9.4%, COE: 8.3% (Beta: 1.1x) and 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.
- Growth from overseas markets, such as China, Hong Kong, India, Indonesia and Taiwan, including initiatives in digital banking
Jonathan Koh CFA
UOB Kay Hian
|
http://research.uobkayhian.com/
2016-08-10
UOB Kay Hian
SGX Stock
Analyst Report
19.15
Up
18.900
