DBS - RHB Invest 2016-08-08: Credit Cost Concerns Likely Overblown

DBS - RHB Invest 2016-08-08: Credit Cost Concerns Likely Overblown DBS GROUP HOLDINGS LTD D05.SI

DBS - Credit Cost Concerns Likely Overblown

  • DBS recorded 2Q16 pre-provisioning operating profit growth of 11% YoY, which reflects the strength of its core operations. 
  • Whilst we have raised our 2016 provisions assumptions to factor in higher risk of NPLs from oil & gas borrowers, we raised our loan growth forecast to factor in the stronger pipeline. Its recent share price weakness has already factored in the negatives. 
  • Maintain BUY and GGM-derived SGD17.30 TP (17% upside) on the expectations of loan growth offsetting the weakness from 2H16’s NIMs compression.

Net interest margin (NIM) could soften in 2H16, but a 2017 widening is likely. 

  • While DBS’ net interest income was flat QoQ (+5.2% YoY), the 12bps YoY NIM widening to 1.87% was a big positive. Thus, with a lower Singapore Interbank Offered Rate (SIBOR), we cut our 2016 NIM forecasts by 4bps to 1.82%.
  • However, we believe 2017 NIMs could widen to 1.88% on higher probability of the US federal funds rate hike leading to higher interest rates domestically.

Loan growth a positive. 

  • We raised our 2016 loan growth forecast to 4%, as management has guided for mid to single-digit growth. This was as loans expanded 3.9% QoQ, driven by the transportation, storage and communications sectors.

We raised credit cost assumptions. 

  • We are raising our provisioning expectations by 24% to SGD1.12bn to factor in the higher risk of oil & gas loans turning into non-performing post the Swiber developments. 
  • DBS recorded 2Q16 credit cost (specific loan allowances) of 48bps, sharply higher than 1Q16’s 18bps. This is due to the SGD150m for its exposure to Swiber.

Attractive valuation. 

  • Our raising of loan growth forecasts and non-interest income has largely offset our provisions increase assumptions. Hence 2016 earnings forecasts are largely unchanged. 
  • 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/BV of 1x (5-year historical mean of 1.07x), and 2016 P/E of 10.5x (5-year historical mean of 9.6x). Maintain BUY.

Results highlights 

DBS’ 2Q16 net profit of SGD1.05bn was 6% lower YoY. 

  • 1H16 net profit of SGD2.25bn represents 54%/53% of our/consensus forecasts respectively and, hence, is in line with expectations.
  • The bank’s non-performing loans (NPL) ratio of 1.1% was slightly higher than 1Q16’s 1%.
  • An interim dividend of 30 cents was declared. We are forecasting for a full year of 60 cents.

Oil & gas exposure 

  • As at June, DBS had a SGD7bn of exposure to the oil & gas support services sector, of which SGD6bn are loans. The breakdown is as follows: 
    1. SGD2bntostate-owned/government-linkedshipyards; 
    2. SGD5bn (balance) is 90% secured, of which: 
      1. SGD2.3bn is spread quite evenly to five names (one of which has shown weakness); 
      2. SGD2.7bn is to 90 names, of which one-third of this portfolio has weakness.
  • To factor in the likelihood of possible asset deterioration, we have raised our 2016 provisioning forecast to SGD1.12bn (from SGD900m previously).

Loan trend 

  • DBS recorded a robust 3.9% QoQ 2Q16 loan expansion, although the YTD expansion is a mild 0.5%. The transportation, storage and communications spaces contributed and the bank gained market share in the Singapore housing mortgage space. This more than offset the continued decline in China trade loans. Recall that such trade loans have fallen 67% over the past 24 months.
  • Management sees a good loans pipeline and is guiding for mid to single-digit 2016 loan growth. We raise our 2016 loan growth forecast to 4% (from -1.5%). We see loan growth offsetting the expected 2H16 NIM squeeze to keep net interest income stable at 2Q16’s levels.

Leng Seng Choon CFA RHB Invest | http://www.rhbinvest.com.sg/ 2016-08-08
RHB Invest SGX Stock Analyst Report BUY Maintain BUY 17.300 Same 17.300