DBS Group - CIMB Research 2016-11-01: 3Q16 Earnings beat, but oil & gas woes remain

DBS Group - CIMB Research 2016-11-01: 3Q16 Earnings beat, but oil & gas woes remain DBS GROUP HOLDINGS LTD D05.SI

DBS Group - 3Q16 Earnings beat, but oil & gas woes remain

  • 3Q16 net profit of S$1,071m was slightly ahead of our expectations (S$1,001m) and consensus (S$1,040m). 9M formed 79%/78% of our/consensus full-year forecasts.
  • NII fell 1% qoq on 10bp NIM contraction as asset yields fell. Non-NII (+3% qoq) rose on stronger cards, wealth management, trading and gain on fixed assets.
  • CIR fell to 40.9% (2Q: 44.0%). NPL ratio rose to 1.3% (2Q: 1.1%) due to oil & gas.
  • Acquisition of ANZ wealth/retail ops to be earnings accretive 1 year after completion.
  • Maintain Hold, with a higher GGM-based TP of S$15.40 (0.86x CY17 P/BV).

Earnings beat on better non-NII and disciplined cost management 

  • 3Q16 net profit of S$1,071m (+2% qoq, +0.5% yoy) beat estimates on stronger non-NII (+3% qoq, +24% yoy) and lower expenses (-7% qoq, -5% yoy). 
  • Credit card fees did well on higher transactions, wealth management was supported by AUM growth and trading did better qoq with increased market volatility. 
  • Cost-income ratio (CIR) fell to an unexpected 40.9% (2Q: 44.0%) on productivity gains from digital banking and strategic cost management initiatives. 
  • DBS guides for FY16 CIR of 43-44% and flat yoy in FY17F.

NIM fell 10bp on lower asset yields; loan growth +2% qoq 

  • NIM fell 10bp qoq to 1.77% due to the lower SIBOR/SOR and as DBS shored up liquidity ahead of the expected Fed hike. LDR fell slightly to 89.5% (2Q: 91.8%). 
  • NIM is expected to fall 4-5bp in 4Q, but FY16 NIM should still be above 1.77% in FY15. Loan growth stayed healthy at 2% qoq from Singapore mortgages and funding corporates’ overseas investments. 
  • Management guided for mid-single-digit loan growth in FY17.

Asset quality weakens on oil & gas exposure; more NPLs to come 

  • NPL ratio rose to 1.3% (2Q: 1.1%), largely due to commodities. Of the S$1,055m in new NPA formation, c.60% came from a chunky oil & gas loan and steel exposure. 
  • DBS expects more oil & gas NPLs in 4Q16-1Q17F as it continues discussions with customers seeing weakness (S$1.3bn of loans; 2Q: S$0.9bn), although these NPLs should be less chunky (avg. loan of S$30m). NPL ratio could go up to 1.4% in 4Q and 1.5% in FY17.

Higher provisions, but coverage ratio drops to 100% 

  • Total provisions were higher than expected at 60bp in 3Q, as GPs (23bp) were buffed up after a reversal in 2Q for Swiber (-32bp), and SPs remained high at 30bp. 
  • Despite the higher provisions, coverage ratio fell to 100% (2Q: 113%) as SPs were written off with S$491m of NPLs. We expect further SPs ahead on writedown of collateral values (last valuation in Jun) and oil & gas NPLs. DBS expects to maintain coverage ratio at 100%.

Acquiring ANZ wealth and retail banking operations in 5 countries 

  • DBS is acquiring ANZ’s wealth and retail banking operations in five countries at S$110m above book value (0.5% of AUM). 
  • DBS expects to derive net profit of S$200m in 2019 (currently S$50m) as it expands AUM in Singapore and Hong Kong by 14% and rolls out its digital banking strategy in Indonesia and Taiwan to ANZ’s 0.94m customer base. The acquisition will add S$200m/S$600m revenue in 2017/18 and be accretive in 2019.

Maintain Hold 

  • DBS showed its ability to recognise steady profits amid poorer asset quality, but the drop in its coverage ratio to 100% means more GPs may be required despite guidance for SPs to be flat yoy at S$850m in FY17. Its acquisition of ANZ could be mildly earnings dilutive in FY17, before turning accretive in FY19. 
  • Maintain Hold, with GGM-based TP of S$15.40 (0.86x CY17 P/BV) as we roll over to CY17 and raise FY16-18F EPS for lower CIR and higher non-NII. 
  • Upside/downside risk is NIM expansion/higher provisions.

Jessalynn CHEN CIMB Research | http://research.itradecimb.com/ 2016-11-01
CIMB Research SGX Stock Analyst Report HOLD Maintain HOLD 15.40 Up 15.310