DBS Group - CIMB Research 2017-05-02: Earnings Beat On Lower Provisions

DBS Group - CIMB Research 2017-05-02: Earnings Beat On Lower Provisions DBS GROUP HOLDINGS LTD D05.SI

DBS Group - Earnings Beat On Lower Provisions

  • 1Q17 net profit of S$1.25bn was above our estimate (S$1.11bn) and consensus (S$1.03bn), on lower SPs and a record high for fee income, backed by WM fees.
  • Excluding one-offs but taking into account the S$350m in GP, we deem core net profit came in above at S$860m (20% of our FY17 forecast) and core ROE at 8%.
  • NIM expanded 3bp qoq to 1.74%, while loans grew 1% in constant currency terms.
  • NPL ratio was flat at 1.4% as three new oil & gas NPLs were offset by S$170m of NPL sales in India. This also boosted allowance coverage ratio to 103%.
  • We maintain our Hold call, with a higher GGM-based target price of S$18.75 (1.04x CY17 P/BV) as we tweak our assumptions for fee income growth and NIM.

Earnings beat on lower specific provisions 

  • We estimate DBS’s 1Q17 core net profit came in at S$860m (-6% qoq, -26% yoy) if we exclude one-off items but include the S$350m put into general provisions (GP). 
  • Preprovision profit (PPOP) was in line, but earnings beat our estimate (S$760m) mainly due to lower specific provisions (SP) of S$200m (CIMB: S$300m). 
  • While reported ROE came in at 11% with the help of one-off gains, we estimate core ROE was only 8%.

NIM expanded 3bp but NII broadly flat; 2017 NIM guidance tapered 

  • NIM rose 3bp qoq to 1.74%, of which 1bp was from SG and 2bp from HK, which benefited from higher US$ rates and sticky deposits (60% CASA ratio). However, higher funding costs and negative forex impact on loan balances left net interest income (NII) flat. 
  • DBS guided for 2017 NIM to stay flat at 1.8% with two more US Fed rate hikes, but could fall to 1.77-1.78% with one hike. 2017 loan growth target was intact at mid-single digits, driven by housing loans (+S$4.5bn), trade growth and cross-border investments.

Fees had a fantastic quarter, though partly one-off 

  • Fees did exceptionally well, rising 29% qoq/16% yoy to S$665m. The improvement was broad based, but most notably in wealth management (WM), which rose 41% qoq/26% yoy to a record S$222m on higher product sales and market share gains. Management guided this figure could ease in 2017. 
  • Trade fees picked up (+6% qoq, +11% yoy) on the back of 3% qoq/5% yoy constant currency growth in trade loans. However, poor trading income (-32% qoq, -14% yoy) brought non-NII in line with our estimate.

NPL ratio stayed flat at 1.4% with the help of NPL sales in India 

  • NPL ratio was unchanged at 1.4%, with the help of S$170m of NPL sales in India. This partially offset the S$523m in new NPAs, of which S$360m-370m came from three oil & gas accounts. 
  • SP for new NPAs was low at S$53m on small expected losses. Guidance for 2017 allowances was unchanged at S$1.0bn-1.1bn (excluding S$350m GP in 1Q), implying higher average quarterly provisions of S$280m. This factors in further deterioration in the oil & gas book and lower collateral values of specialised vessels.

Maintain Hold 

  • Better sentiment is driving DBS’s share price, but fundamentally we still see challenges ahead. 
  • We expect ROE to moderate in the remaining quarters of 2017 from 1Q’s headline 11% in the absence of one-off gains, normalisation of WM fees and higher provisions. Maintain Hold. 
  • We tweak FY17-19 EPS forecasts on changes in assumptions for fee income and NIM, and our GGM-based target price rises to S$18.75 (1.04x CY17 P/BV). 
  • Upside/downside risks include higher/lower S$ rates and oil prices.

Jessalynn CHEN CIMB Research | http://research.itradecimb.com/ 2017-05-02
CIMB Research SGX Stock Analyst Report HOLD Maintain HOLD 18.75 Up 17.660