DBS Group - Maybank Kim Eng 2016-11-01: Negatives price in; U/G HOLD

DBS GROUP HOLDINGS LTD D05.SI

DBS Group (DBS SP) - Negatives price in; U/G HOLD

9M16 core PATMI of SGD3.3b beat on higher non-interest income and lower costs, but provisions were higher than our expectations.
3Q16 core PATMI was flat YoY. Key factors were:
1. flat YoY growth in net interest income from lower SGD interest rates and higher liquidity buffers; and
2. higher provisions (> 100% YoY).

It also announced a small bolt-on acquisition of ANZ’s wealth management and retail business, which is not expected to have material impact on capital.
We raise FY16-18E earnings estimates by c.1% each to reflect higher non-interest income and lower costs, offset by higher provisions.
Our TP is raised 2% to SGD14.55 based on ~0.8x FY17E P/BV. We think the negatives are largely priced in.
U/G to HOLD.

Group NPLs rose to 1.3% (2Q16: 1.1%). NPAs increased 12% QoQ as an O&G name (~SGD460m) was moved to NPA during the quarter. This was offset by SGD491m of write-offs, of which ~40% were attributed to Swiber.
Provision coverage fell to 100% (2Q16: 113%). Aside from O&G, commodities (e.g. steel and coal) and SMEs could be facing some stress. With that, we raised FY16-18E provisions by 5-15% and credit costs from 39-44bps to 45-49bps.
The key differentiator in 3Q was lower costs, as cost-income ratio (CIR) was reduced significantly to 41% (2Q16: 46%). Management attributed it to strategic cost management and enhanced productivity from digitalization, and expects FY16E CIR to be 43-44%. We lowered our cost assumptions slightly by 1% for FY16-17E.

As DBS is sensitive to re-pricing interval, NIM compressed 10bps QoQ to 1.77% from lower SGD rates. Similar to peers, customer spreads declined to 2.03% (2Q16: 2.10%), despite a heightened risk environment.
We expect stable NIM for DBS at 1.77%-1.78% for FY16-17E. To compete on loans growth, we think Singapore banks may face pricing pressure to accept lower spreads.

TP is revised up to SGD14.55 based on ~0.8x FY17E P/BV, which is close to 1.5SD below the historical mean to reflect our lower forecast ROE compared to prior periods.
Risks to our call are:
1. NIM recovery;
2. higher non-interest income; and
3. benign credit costs.

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/ 2016-11-01

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