DBS GROUP HOLDINGS LTD
D05.SI
DBS Group Holdings (DBS SP) - 1Q17 NPL Formation And Specific Provisions Have Eased Sequentially
- DBS achieved record core earnings of S$1,210m with strong growth in fee income of 15.9% yoy and reduction in operating expenses of 0.6% yoy.
- NPL formation and specific provisions have peaked and uncertainties from exposure to the oil & gas sector have diminished.
- DBS has a track record of consistency in execution and delivering good results.
- Maintain BUY. Target price: S$23.30.
RESULTS
- DBS reported underlying net profit S$1,210m (+1% yoy) for 1Q17, above our expectation of S$1,052m.
- There were one-off items totalling S$35m (gains from divestment of PwC Building of S$350m were utilised to beef up general provisions, integration costs for ANZ retail and wealth management operations: -S$10m, tax on one-off items: S$45m). Including one-off items, net profit would be S$1,245m.
Turnaround in NIM.
- Loans contracted 0.8% qoq as USD (33.2% of total loans) and HKD (11.1%) weakened by 3.7% against the Singapore dollar. Corporate loans contracted 3% qoq due to lumpy repayments while trade loans expanded 8% qoq due to recovery in intra-regional trade.
- NIM expanded 3bp qoq to 1.74% due to improvement in asset yield.
Strong sequential recovery from wealth management.
- Fees expanded 15.9% yoy and 29% qoq, boosted by transaction services (+11% yoy, +6% qoq) and wealth management (+26% yoy, +41% qoq).
- Net trading income was soft at S$270m, 14% lower yoy compared with S$315m clocked last year.
Improved cost efficiency.
- Operating expenses were reduced by 0.6% yoy, reaping the rewards from previous investments in digitalisation and efforts in cost management.
- Cost/income ratio of 43.2% was in line with management guidance.
Easing of pressure on asset quality.
- New NPLs have eased from S$779m in 4Q16 to S$523m in 1Q17.
- NPL balance decreased 1.2% qoq as DBS disposed S$170m of NPLs in India to an asset restructuring company.
- NPL ratio eased marginally by 1bp qoq to 1.44%.
- Specific provisions were S$198m, a significant decrease of 57% qoq.
- DBS has utilised gain of S$350m from divestment of PwC Building to beef up general provisions. Thus, loan-loss coverage recovered by 6.3ppt to 103.2%.
To conduct review of dividend policy.
- DBS’ fully phased-in CET-1 CAR improved 0.9ppt qoq to 14.2%, significantly above minimum requirement of 9%. Management is comfortable with CET-1 CAR of 12.5-13.5%.
- The implementation for Basel 4 is likely to be delayed. Thus, management has decided to review DBS’ dividend policy for 2017.
ESSENTIALS – HIGHLIGHTS FROM RESULTS BRIEFING
Outlook for 2017.
- Management has guided mid-single digit growth in loans and operating income for 2017. NIM is expected to improve to 1.80% (1Q17: 1.74%), assuming the two anticipated US interest rate hikes materialises in subsequent quarters, while cost-to-income ratio (CIR) should hold at 43%.
- Management guided total provisions of S$1.0b-1.1b (2016: S$1.4b).
- Management expects loan growth from: a) customers in Singapore and China expanding overseas, including project financing and M&A deals.
- Management see growth potential from infrastructure projects, b) Management also sees pick-up in SME loans, and c) new loans of S$5b-6b from its consumer business.
Margin expansion from Hong Kong.
- NIM expanded by 3bp qoq. Management attributed 2bp of the improvement to its Hong Kong operations. HKD CASA ratio has improved from 33.3% to 52.2% over the past two years due to its strengthened cash management and wealth management businesses. Thus, DBS HK’s NIM expanded 15bp qoq to 1.79%, benefitting from the rise in HIBOR.
No chunky new NPLs.
- DBS has aggregate exposure to 90 smaller O&G accounts of S$2.9b. About half of these companies are vulnerable, some of which may slide to become new NPLs. Three of these companies were classified as NPLs in 1Q17 and they accounted for S$300m-400m of new NPLs.
- The impact on asset quality from further deterioration of this portfolio should be manageable. There is also uncertainty relating to valuation of collaterals for 2-3 specialised vessels (non-standard), should the need arise to dispose them.
STOCK IMPACT
Scaling new heights despite challenging operating environment.
- DBS’ core earnings of S$1,210m was a record high. Its fee income of S$665m was also a record high.
- NPL formation and specific provisions peaked and have eased on a sequential basis. Investors should be gratified that NIM has expanded in both Singapore and Hong Kong.
EARNINGS REVISION/RISK
- We have raised our net profit forecast for 2017 by 6.9% and 2018 by 8.2% due to strong growth in fees and moderation in NPL formation and credit costs.
VALUATION/RECOMMENDATION
- Maintain BUY.
- Our target price of S$23.30 is based on 1.25x 2017F P/B, derived from the Gordon Growth Model (ROE: 9.9% (previous: 9.4%), COE: 8.0% (Beta: 1.1x) and Growth: 0.5%).
SHARE PRICE CATALYST
- NIM expansion from higher interest rates in Singapore and Hong Kong.
- Improvement in cost/income ratio.
- Growth from overseas markets, such as China, Hong Kong, India, Indonesia and Taiwan, including initiatives in digital banking.
Jonathan Koh CFA
UOB Kay Hian
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http://research.uobkayhian.com/
2017-05-03
UOB Kay Hian
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