DBS - RHB Invest 2016-11-01: Widening NIM The Catalyst To Watch

DBS - RHB Invest 2016-11-01: Widening NIM The Catalyst To Watch DBS GROUP HOLDINGS LTD D05.SI

DBS - Widening NIM The Catalyst To Watch

  • Given the surge in 2016 provisions, we are projecting flattish provisions next year. Although we expect asset quality to deteriorate further with forecast NPL ratio of 1.8% by end-2017 (3Q16: 1.3%), we are forecasting wider NIM of 1.82% in 2017 (3Q16: 1.77%), on higher SIBOR and SOR. 
  • DBS’ acquisition of ANZ’s banking businesses in five markets would underpin growth at its wealth management business, which we rate positively. 
  • Maintain BUY with GGM-derived TP of SGD17.30 (16% upside).

We forecast NPL ratio to rise to 1.5% by end-2016, from 1.3% in 3Q16. 

  • With the soft Singapore economy and continued stress from the oil & gas sector, we forecast an even higher NPL ratio of 1.8% at end-2017. 
  • With 3Q16’s loan loss coverage of 100% (and management intending to maintain the ratio) we project 2017 provisions of SGD1.34bn, down 5% YoY.

NIM to widen from higher interest rates. 

  • 3Q16 NIM of 1.77% was 10bps lower QoQ, as SGD interest rates were soft. 
  • Nevertheless, we believe the impending US Federal Reserve rate hike would widen its NIM to 1.82% in 2017. This coupled with projected 2017 loan growth of 3% should expand NII in 2017.

Inorganic expansion into wealth management. 

  • DBS Group Holdings (DBS) expects the acquisition of Australia & New Zealand Banking Group’s (ANZ) (ANZ AU, NR) wealth management and retail banking businesses to add to its income from 2017. The acquisitions should also be earnings accretive within three years, and raise DBS’ wealth AUM by SGD23bn to SGD182bn.

Maintain BUY 

  • Maintain BUY with unchanged GGM-derived TP of SGD17.30, factoring in COE of 10.4% and ROE of 10% (3Q16 ROE: 10%). 
  • We raise DBS’ 2016 net profit forecast by 3% on higher non-II projections. 
  • Downside risks to our forecasts include higher-than-expected impairment charges.

Leng Seng Choon CFA RHB Invest | http://www.rhbinvest.com.sg/ 2016-11-01
RHB Invest SGX Stock Analyst Report ADD Maintain ADD 17.300 Same 17.300