DBS Group - CIMB Research 2017-02-16: Expect earnings pressure to continue through 1H17

DBS Group - CIMB Research 2017-02-16: Expect earnings pressure to continue through 1H17 DBS GROUP HOLDINGS LTD D05.SI

DBS Group - Expect earnings pressure to continue through 1H17

  • 4Q16 core net profit of S$913m was a slight miss on higher specific provisions (SP).
  • FY16 core net profit of S$4,200m formed 99% of ours and consensus forecasts.
  • NPL ratio rose to 1.4% as more oil & gas loans turned sour. Provision coverage ratio fell to 97% as GPs were deferred to 1Q17 following the sale of PwC building.
  • We raise our FY17-19 EPS forecasts by 3-7% for higher topline growth, partially offset by higher provisions as we expect difficulties in the OSV segment to continue.
  • Maintain Hold with a higher GGM-based target price of S$17.66 (0.99x CY17 P/BV).

Profits missed and ROE suffered 

  • 4Q16 net profit of S$913m (-15% qoq, -9% yoy) fell short of market expectations as positives from steady NII and cost discipline were wiped out by seasonally weak fees and ballooning provisions (+6% qoq, +87% yoy). 
  • Total credit costs rose to 62bp purely on SPs. 
  • Coverage ratio fell to 97%, below the bank’s guidance of a 100% floor. S$350m in profit from sale of PwC building in 1Q17 will be put into general provisions (coverage ratio in theory: 104%). 
  • ROE fell to 8.4%, the lowest since the global financial crisis.

It appears the worst for oil & gas is not over after all 

  • NPL ratio rose to 1.4% (3Q16: 1.3%) as more oil & gas (O&G) loans were classified. Of its S$5.5bn exposure to non-state owned OSV companies: 
    1. S$2.6bn is to five chunky names, of which two are now in NPAs (one in 3Q16). 
    2. The remaining S$2.9bn exposure to 90 names now has half the portfolio showing weakness, up from a third previously. 
  • Three of the 90 names became NPLs in 4Q, bringing the total to six names.
  • Two thirds of the vessels are still being utilised. NPL ratio for OSV segment was 21%.

How much worse can it get? 

  • Of the S$3.5bn in new NPA formation in 2016, half were from O&G: S$721m for Swiber, S$800m for two large names and S$200m for six smaller exposures. 
  • Another S$1.25bn of smaller O&G loans looks weak but has not turned into NPLs, and may face problems amid falling charter rates and contract terms in the absence of new E&P spending. 
  • While DBS shared three anecdotes where it sold vessels above the marked down collateral value, larger purpose-built vessels may be harder to sell or need steeper discounts.

2017 guidance – nothing to be too optimistic about 

  • DBS guided for 2017 loan growth to remain in the mid-single digits (2016: 6%), NIMs to stay flat yoy (2016: 1.80%), flat cost-income ratio (previously -1% pt yoy), and provisions to be slightly lower (less $400m from Swiber, add $350m GP). 
  • We factor in marginally higher provisions yoy. 
  • The onboarding of ANZ in mid-2017 could also incur total integration costs of S$200m-250m, of which the bulk could be recognised in 2017. 
  • We expect 4% profit growth in 2017 to be driven mainly towards the latter half of 2017.

Maintain Hold 

  • Share price has done well since Nov on expectations of higher interest rates. We think upside from here could be capped by the risk of further O&G defaults, especially as DBS is the most exposed to larger and highly geared names. 
  • We raise our FY17-19F EPS forecasts by 3-7% to factor in stronger topline growth, partially offset by higher provisions. 
  • We keep our Hold call with a higher GGM-based TP of S$17.66 (0.99x CY17 P/BV). 
  • Upside/downside risk to our call is sustained recovery/prolonged drag in oil price.

Jessalynn CHEN CIMB Research | http://research.itradecimb.com/ 2017-02-16
CIMB Research SGX Stock Analyst Report HOLD Maintain HOLD 17.66 Up 15.400