DBS Group (DBS SP) - Maybank Kim Eng 2017-02-17: Proactive steps

DBS GROUP HOLDINGS LTD D05.SI

DBS Group (DBS SP) - Proactive steps

DBS’s FY16 core PATMI was in-line with our expectations. FY16 pre-provision profits grew 10% YoY, which also underlies its ability to grow revenues and cut costs amid worsening asset quality.
We raise FY17-18E earnings estimates by 10-11% to reflect mainly a higher loan growth assumption of 4% (from 2%). We also introduce FY19 estimates.

Challenge would be maintaining/growing market share amid rising competition.
Our TP is raised c.16% to SGD18.13 based on ~1.0x FY17E P/BV (from ~0.9x previously). Despite revisions, we maintain HOLD and await signs of a bottom in asset quality deterioration and/or rising rates.

DBS is sensitive to repricing interval as ~60% of its SGD loan book is priced in SIBOR/SOR. With lower SGD rates, 4Q16 customer spreads declined to 2% (3Q16: 2.03%). FY16 loans growth at 6% YoY was better than our expectation.
Market share for Singapore housing loans improved to 29% from 28% in 3Q16. We think there may be some compression in loan yields given the increased appetite to gain market share.
Similar to OCBC (OCBC, SELL, TP SGD8.05), DBS expects FY17 NIM to remain stable despite the positive outlook on Fed rate hikes.

4Q shows some proactive steps that the bank is taking in recognizing new O&G accounts as NPAs and taking in more specific provisions.
While the pace of acceleration in provisions for O&G may be slower in 2017, we think provisions are likely to remain elevated as the woes in O&G support services sector are not over.

With net profits revised upwards by 10-11% for FY17-18E, we raise our TP c.16% to SGD18.13, based on ~1.0x FY17E P/BV (from 0.9x FY17E P/BV) on lower ROEs.
With the change in EPS, our assumed sustainable ROE is now 10.4% (9.6% previously), COE of 10.5% and growth rate of 3.5%.
Risks to our call are:
1. NIM improvement from higher rates;
2. higher non-interest income; and
3. lower provisions.

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/ 2017-02-17

Maybank Kim Eng SGX Stock Analyst Report HOLD Maintain HOLD 18.13 Up 15.680