DBS Group (DBS SP) - Maybank Kim Eng 2017-08-07: Patience Is A Virtue

DBS GROUP HOLDINGS LTD D05.SI

DBS Group (DBS SP) - Patience Is A Virtue

1H17/2Q17 core PATMI of SGD2.3b (+3.2% YoY) and SGD1.1b (-6.2% QoQ, +7.1% YoY) respectively.
1H17 earnings were slightly below our expectation and met 45% of our previous FY17 forecast of SGD5.1b.
We reduced our FY17E net profit slightly by ~2% as we:
1. lowered our expectations of higher net interest income; and
2. reduced our non-interest income forecast, mainly for lower trading income.

But we raised FY18-19E net profit slightly by ~1% on higher income.
Our TP is raised to SGD21.50 after rolling forward valuations to FY18 and pegging to an unchanged 1.1x FY18E P/BV, slightly below its 10-year mean of 1.2x.
With limited upside to DBS' current share price, maintain HOLD.

Loan growth in 2Q17 remained healthy at 5% YoY in constant currency terms. Given sanguine economic prospects and recovery in the Singapore property market, we remain optimistic and raised our FY17-18E loan growth to 6-8% (from ~6% previously). This is ahead of management’s guidance of a mid-single digit growth for FY17.
Customer spreads improved to 2.03% in 2Q17 (1Q17: 1.99%). However, we lowered our FY17E NIM from 1.80% to 1.77%, although this is still slightly ahead of management guidance of 1.75-1.76%.
While we believe DBS is a key beneficiary of rising rates, lending yields could come under some compression due to competition and the need to offer more attractive rates to gain market share.

Management guided specific provisions will be around SGD1b for FY17- 18E mainly due to exposures to the O&G support services sector. This is not new as more restructuring and decline in collateral value of the vessels could require higher specific provisions.
Our estimates factored in SGD1.3-1.4b of provisions for FY17-18E.

With the change in EPS, our assumed sustainable ROE is now 11.1%, COE at 10.5%, and growth rate at 3.5%. Our target P/BV is maintained at 1.1x.
Our TP is raised to SGD21.50 after rolling forward to FY18E.
Risks to our call are:
1. NIM improvement from higher rates;
2. higher non-interest income; and
3. lower provisions.

1H17 and 2Q17 core PATMI were SGD2.3b (+3.2% YoY) and SGD1.1b (-6.2% QoQ, +7.1% YoY) respectively. 1H17 earnings were slightly below our expectation and met 45% of our previous FY17E forecast of SGD5.1b.
2Q17 NIM was flat QoQ at 1.74% due to softer HIBOR rates as loans were priced off 1M HIBOR.
There are a few positives:
1. healthy loan growth of 5% YoY in 2Q17 in constant currency terms;
2. cost-income ratio maintained at 43% from strategic cost management and improved productivity from digitalization efforts; and
3. fully-loaded CET1 capital ratio remains the strongest among peers at 14%.
For FY17, management guided mid-single digit loan growth, NIM of 1.75- 1.76% on average, and cost-income ratio of 43%.
Management expects specific provisions to be around SGD1.1b mainly from exposures to the O&G support services sector.

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/ 2017-08-07

Maybank Kim Eng SGX Stock Analyst Report HOLD Maintain HOLD 21.50 Up 19.180