DBS Group - CIMB Research 2017-08-04: 2Q17 Good But Not Great

DBS Group - CIMB Research 2017-08-04: 2Q17 Good But Not Great DBS GROUP HOLDINGS LTD D05.SI

DBS Group - 2Q17 Good But Not Great

  • DBS's 2Q17 net profit of S$1,130m (+8% yoy, -9% qoq) was within our estimate (S$1,149m) and consensus (S$1,176m). 1H17 net profit was in line at 51% of our FY17F forecast.
  • With a mixed bag of positives and negatives, we consider 2Q17 results to be good, but not great.
  • NII rose 3% qoq on the back of broad-base loan growth though NIM was unchanged qoq at 1.74%. NIM guidance was moderated to 1.75-1.76% for FY17F.
  • Asset quality pressure to continue with low oil prices.
  • We maintain our Hold call on DBS with a higher GGM-based target price as the stock is trading above its 7-year mean of 1.2x P/BV.

2Q17: decent quarter but expect continued bites from low oil price 

  • With a mixed bag of positives and negatives, we consider DBS's 2Q17 results to be good, but not great. The bank declared 1H17 DPS of 33 Scts, up 10% from the recent half-yearly payouts. In all, DBS achieved 10.1% ROE in 2Q17 (1H17: 10.6% ROE). 
  • Looking ahead, broad-base loan growth, positive business momentum and structural improvement in cost-income ratio are the pluses; while the moderation in NIM guidance and higher credit costs are the minuses.

NIM flat qoq as Singapore rates were offset by lower HIBOR 

  • 2Q17 NII rose 3% yoy as loan growth of 6% more than offset 13bp yoy decline in NIM to 1.74%. On qoq, NII increased 3% as loans grew 2% from higher corporate, trade, consumer and Singapore housing loans. We note that loan growth was back-ended, and should contribute to further NII growth in 3Q17. 
  • NIM was unchanged qoq at 1.74% as higher Singapore interest rates (resulted in 2bp improvement in NIM) was eroded by lower HIBOR (resulted in 2bp decline in NIM, due to excessive liquidity).

NIM guidance moderated to 1.75-1.76% for FY17F 

  • While 2017 loan growth target was kept at mid-single digit, management now expects NIM to only increase by 2-3bp in 2H17, and expect NIM to come in at 1.75-1.76% for FY17F (vs. our previous expectation of 1.77-1.78%). 
  • NIM improvement is expected to be underpinned by pass through of higher US$ rates to S$-rates and HIBOR normalisation, with US$/S$ the swing factor.

Net fee income was up 1% yoy; other non-NII dropped 13% yoy 

  • 2Q17 net fee income was up 1% yoy as wealth management (stronger sales of unit trusts and other investment products) and cards were offset by investment banking (halved due to high-base effect) and loan-related fees. Net fee income was 4% below 1Q17's record high, while business momentum was sustained. 
  • Meanwhile, other non-NII dropped 13% yoy from lower trading income, income from securities and the absence of gains.

Asset quality pressures to continue 

  • NPL formation in 1H17 moderated from the high levels of the previous three quarters, though NPL ratio inched up slightly to 1.5% (1Q17: 1.4%). 
  • Specific allowances for 2Q17 amounted to S$304m (40bp of loans), bringing the amount for 1H17 to S$504m. Allowance coverage stood at 100% (1Q17: 103%). 
  • With oil price struggling to move upwards of US$50/bbl, management believes that asset quality pressure will continue. It now expects slightly higher specific provisions vs. previous guidance of S$1bn-1.1bn for FY17F. We expect specific provisions for FY18F to be S$1.1bn-1.2bn.

Maintain Hold with higher target price 

  • Our Hold call is intact as DBS is trading above its 7-year mean of 1.2x P/BV. But we raise our GGM-based TP (to S$21.50) as we realign our Singapore discount rates across the bank sector.
  • With strong CAR (capital adequacy ratios), we see scope for DBS to increase its payout ratio. Management is awaiting clarity over impending regulations such as implementation of IFRS 9 and Basel IV before firming dividend payout plans. 
  • We increase our FY17-19F DPS by 6-10%. 
  • Thanks to its sticky Singapore-dollar deposits (CASA ratio of 91%), the market views DBS as the most sensitive to US rate hikes. 
  • In addition, with the peak of oil & gas NPA formation over, investors have rerated DBS from 1.12x current P/BV in Jan 17 to 1.26x in Aug 17. 
  • YTD, the stock has gained 23.9%, and we believe that positives have been priced in. Hold maintained.
  • Upside/downside risks include higher/lower S$-rates and oil prices.

Continued business momentum 

  • In the CEO observations presentation, CEO Piyush Gupta highlighted continued momentum in some of the bank’s various activities, which should translate into earnings sustainability. Namely, 
    • DBS grew market share in Singapore mortgages by 80bp yoy to 28.7% in Jun 17. Buoyed by a pick-up in housing activities, new bookings in 2Q17 were at the highest in five years.
    • Secondly, market share for credit cards in Singapore was at a record high. Ending net receivables increased 80bp yoy to 20.6% in Jun 2017, while billings increased 90bp yoy to 19%.
    • Thirdly, AUM under wealth management increased 16% yoy to S$175bn. The bank expects to add another c.S$20bn to AUM with the integration of ANZ, which is on track. Integration with ANZ China has been completed, while phased integration with Singapore, Hong Kong, Taiwan and Indonesia will take place over 3Q17-1Q18.
    • Fourthly, cash management under Global Transaction Services climbed 28% yoy in 1H17, and trade assets are being rebuilt, after the drop-off in 2016.

YEO Zhi Bin CIMB Research | http://research.itradecimb.com/ 2017-08-04
CIMB Research SGX Stock Analyst Report HOLD Maintain HOLD 21.50 Up 18.750