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).

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.

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%.

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.

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.

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