DBS Group - Maybank Kim Eng 2016-08-09: A tougher road

DBS GROUP HOLDINGS LTD D05.SI

DBS Group - A tougher road

1H16 core PATMI of SGD2.3b is flat YoY. Results reflected:
1. provisions may not be adequate with a write-back in general provisions of SGD228min 2Q;
2. broad-based asset quality deterioration seen in O&G portfolio, South/SEA (manufacturing, O&G sectors in Indonesia), and HK/rest of Greater China (out-of-money RMB hedges).

Interim DPS maintained at SGD0.30/sh with scrip dividend scheme applied.
We cut FY16-18E net profit by 4-9% to reflect lower earnings and higher provisions. Our TP lifted from SGD13.40 to SGD14.30 after rolling forward to FY17 BVPS on ~0.8x FY17E P/BV. The 0.8x P/BV is maintained (sustainable ROE of 9.1%, COE of 10.5% and growth rate of 3.5%).
Maintain SELL.

Group NPL ratio at 1.1% (1Q16: 1.0%) and provision coverage fell to 113% (1Q16: 134%). Management shared that of its SGD23b of O&G exposure, 1-2% are NPLs. This is versus 7.4% for OCBC’s O&G sector.
NPLs for the transport sector (where the O&G support services segment is subsumed) increased to 2.1% vs 1.1% last quarter largely from Swiber. We think provisions may not be adequate and raised our FY16-18E credit costs assumptions from 30-36bps to 39-44bps.

DBS reported a higher NIM (1.87%, +2bps QoQ) for 2Q vs peers thanks to lower cost of funding from its large pool of CASA deposits. However, 2H16 will be tougher as margin compression is expected from lower rates.
We think revenues will be affected by slower growth due to DBS’ exposure to open economies such as Singapore and Hong Kong.

TP was raised to SGD14.30 after rolling forward, based on ~0.8x FY17E P/BV, close to 1.5SD below historical mean to reflect lower ROE forecasts. Catalysts include:
1. a stable market/economy;
2. higher repricing from rate hikes; and
3. risk-weighted assets 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/ 2016-08-09

Maybank Kim Eng SGX Stock Analyst Report SELL Maintain SELL 14.30 UP 13.400