DBS Group - OCBC Investment 2016-10-31: Strengthening Its Wealth Business

DBS Group - OCBC Investment 2016-10-31: Strengthening Its Wealth Business DBS GROUP HOLDINGS LTD D05.SI

DBS Group - Strengthening Its Wealth Business

  • 3Q slightly ahead of consensus.
  • Buying ANZ’s Asia wealth & retail.
  • Cutting FV to S$15.80.

Increase in allowances; drop in operating costs 

  • DBS posted 3Q16 net earnings of S$1.07b, flat YoY and +2% QoQ, and slightly above market estimate of S$1.04b based on a recent Bloomberg poll. 
  • Net Interest Income was flat YoY at S$1.82b, while Non-interest Income showed both YoY and QoQ improvement to S$1.11b. 
  • Net Interest Margin (NIM) came off from 1.87% in the previous quarter to 1.77% this quarter. 
  • Allowances went up substantially from S$178m in 3Q15 and S$366m in 2Q16 to S$436m in 3Q16. 
  • NPL ratio rose from 1.1% in the previous quarter to 1.3% this quarter.

Guiding that NPL will not exceed 1.4% this year 

  • Management is guiding for mid-single digit growth in loan and non- interest income for 2017. 
  • Operating expenses fell 5% YoY and 7% QoQ this quarter, and we expect management to continue to keep a tight watch over expenses as it explores several initiatives including further in-sourcing. 
  • It also guided for NPL to stay below 1.4% for this year.

ANZ acquisition to add AUM of S$23b 

  • It is acquiring ANZ Bank’s wealth management and retail banking business in Singapore, Hong Kong, China, Taiwan and Indonesia for S$110m above book value. This acquisition is expected to add S$23b to its wealth AUM, bringing the total to S$182b. 
  • Management shared that as the bulk of the business is in Singapore and Hong Kong, this acquisition will offer a complementary fit to its existing businesses, growing its customer footprint, assets, revenue and presence. It expects profit contribution of about S$200m in 3 years’ time.

Challenges remain; cutting FV to S$15.80 

  • DBS has underperformed the other two banks and the FTSE Financial Index since the start of the year, down 11% YTD. 
  • We expect some residual effect from the O&G sector and the current softness for the SME market to translate into a softer 4Q. This will mean a lack of near to medium term share price drivers. 
  • However, as the share price has already corrected, at current level, we are maintaining our BUY rating, but cutting our fair value estimate from S$16.68 to S$15.80. Buy at S$15.00 or lower.

Carey Wong OCBC Investment | http://www.ocbcresearch.com/ 2016-10-31
OCBC Investment SGX Stock Analyst Report BUY Maintain BUY 15.80 Down 16.680