DBS Group - OCBC Investment 2017-08-04: Outlook Is Healthy, But Some Challengers Remain

DBS Group - OCBC Investment 2017-08-04: Outlook Is Healthy, But Some Challengers Remain DBS GROUP HOLDINGS LTD D05.SI

DBS Group - Outlook Is Healthy, But Some Challengers Remain

  • 2Q below market expectations.
  • Raised interim dividend to 33 cents.
  • Fair value of S$22.50.

2Q17 net earnings of S$1.13b 

  • DBS posted 2Q17 net earnings of S$1.13b, +8% YoY and -9% QoQ, but this was slightly below market expectations of S$1.16b based on a Bloomberg poll. 
  • Net Interest Income showed a 3% YoY and QoQ improvement, but Non-interest Income fell. Allowances of S$304m reflected a sharp decline from S$550m in the previous quarter. 1H17 net earnings amounted to S$2375m, +5% YoY. 
  • Net Interest Margin (NIM) held steady at 1.74%, same as the last quarter. However, NPL ratio edged up slightly from 1.4% in 1Q17 to 1.5% in 2Q17. 
  • In line with its local peers, Wealth performed well, contributing S$245m in 2Q17, up from S$222m in 1Q17, and making up 34% of total Fee & Commission Income. 
  • Management has declared a 1H dividend of 33 cents, up from 30 cents last year.

Guiding for 2H mid-single digit growth 

  • Management is positive on its outlook and maintaining mid-single digit loan growth guidance for 2017. 
  • The guidance for 2H17 income is also for mid-single digit growth. 
  • Management is cognizant of the still challenging environment for the oil and gas sector and the lack of pricing power for the service providers, which could result in a further decline in collateral value and an increase in provisions. It is expecting another S$300m of bad debt provisions in 2H17. 
  • The asset quality pressure appears to be confined largely to the offshore services sector. Specific provisions for this year are expected to be the same as last year, excluding Swiber.

Maintain HOLD; increasing FV to S$22.50 

  • Wealth is a key driver for DBS. It expects the ANZ acquisition to add another S$20b to its assets under management and S$600m to revenue next year. 
  • Management is aiming to hold cost-income at 43% and shared that its wealth cost-income has been coming off and is below industry average of 70%. 
  • DBS' share price has done well this year, up 25% YTD. At current price, we are maintaining our HOLD rating even though our fair value estimate has been raised to S$22.50. 
  • We prefer to re-enter at S$21.00 or lower.

Carmen Lee OCBC Investment | http://www.ocbcresearch.com/ 2017-08-04
OCBC Investment SGX Stock Analyst Report HOLD Maintain HOLD 22.50 Up 19.970