DBS Group - CIMB Research 2017-11-06: 3Q17 Happy Days Ahead

SGinvestors.io

DBS GROUP HOLDINGS LTD D05.SI

DBS Group - 3Q17 Happy Days Ahead

• DBS Group's 9M17 net profit of S$3,177m (-4% yoy) was below consensus and our expectations, at 68% of our full-year forecast. 3Q17 net profit of S$802m was 17% of our estimate.
• However, we view the group’s move to kitchen-sink its oil & gas credit losses positively. This allows DBS to start 2018F with a clean slate.
• Other positives from the 3Q17 results were the 4% qoq increase in loan volumes and sustained business momentum, which underpinned non-NII.
• With lower SPs ahead and positive operating profit guidance, we upgrade DBS from Hold to Add with a higher TP (S$25.00) 
• Downside risk is weaker NIM expansion.

3Q17: kitchen-sinking means DBS will start 2018F with a clean slate 

• DBS’s 3Q17 net profit of S$802m (-25% yoy) missed consensus and our expectations due to higher-than-expected credit costs. However, we view the move to kitchen-sink its oil & gas loans positively. This allows the bank to start 2018F with a clean slate. 
• DBS was the first among peers to recognise the implications of FRS 109, noting that its general provisions (GP) reserves now exceed the required level. We note that GP writebacks in the P&L are tax deductible. 
• Overall, the group achieved 7.1% ROE in 3Q17.

Accelerating recognition of residual oil & gas exposure as NPAs 

• Taking advantage of upcoming FRS 109, DBS accelerated recognition of residual oil & gas exposure as NPAs. These credits would have otherwise deteriorated in the quarters ahead. In all, net allowances of S$815m were booked in 3Q17, partly offset by S$850m of GP reserves drawn down. 
• New NPAs of S$2.06bn were recognised in 3Q17 and NPL ratio rose to 1.7% (2Q17: 1.5%). GP stock after drawdown stood at S$2.6bn, above the 1% MAS and FRS 109 requirements. Allowance coverage stood at 83% at end-3Q17.

Higher loan volumes drove NII 

• NII increased 9% yoy/5% qoq in 3Q17 on strong loan volumes. Net loans grew 8% yoy/4% qoq to S$314bn (ex-loans of S$6bn from the ANZ consolidation, yoy growth was 6%). 
• Underlying corporate loans rose 2% qoq, while consumer loans were up 2% yoy as DBS’s share of the housing loan market crossed 30%. 
• NIM contracted 1bp qoq/4bp yoy to 1.73%. Singapore NIM improved by 2bp but higher deposit growth (including S$10bn from ANZ consolidation) eroded the improvement. 
• 3Q17 LDR was 86.8% (2Q17: 88.4%).

Fee income benefited from higher WM, IB and cards 

• 3Q17 net fee income rose 12% yoy/8% qoq on higher income from wealth management (WM, +35% yoy), investment banking (IB, +19% yoy) and cards (+13% yoy). Other non-NII fell 20% yoy/was flat qoq due to lower trading income and absence of a S$41m property disposal gain in 3Q16. 
• Total expenses rose 5% yoy/-1% qoq, with cost-toincome ratio at 41.1% in 3Q17 (9M17: 42.5%). 
• Putting it all together, 3Q17 profit before allowances improved 3% yoy/8% qoq, demonstrating healthy business momentum.

Happy days ahead; upgrade to Add 

• Our FY17F headline EPS is 5.5% lower than our previous forecast as we factor in 3Q17 results, but core EPS increased by 3.5% due to different treatment of DBS’s exceptional items (we now include one-off general allowances in 1Q17). 
• We raise FY18F-19F EPS by 14.5-15.1% on positive guidance. With the “cleanest” book among peers, healthy business momentum and most likely to benefit from rising rates, we upgrade DBS to Add. 
• We raise GGM TP (to S$25.00) on valuation rollover and earnings upgrade.

Flushing out residual oil & gas woes

• Taking advantage of the impending FRS 109, DBS accelerated recognition of S$1.7bn residual weak oil & gas exposure as non-performing assets (NPAs). These credits would have otherwise deteriorated in the quarters ahead. 
• About half of these new NPAs came from five chunky names, of which, we understand only one account has not turned NPA as it enjoys strong support from its parent company. The other half of the new NPAs are attributable to 100-odd names. With this move, DBS views its loan book as largely clear of oil & gas woes. Also, the bank emphasised that it was conservative in recognition of NPAs.
• About two-thirds of the oil & gas NPAS are current or less than 90 days overdue. In addition, vessel collaterals were further marked down to liquidation values (or 25% of 2014 vessel valuation), resulting in an increase in unsecured NPAs in 3Q17. Outstanding specific allowances of S$3bn were sufficient to fully cover the unsecured portion of NPAs.
• Given its conservative assumptions for both NPA recognition and collateral valuation for vessels, DBS deems its 50% allowance coverage for oil & gas adequate. Meanwhile, asset quality for the rest of portfolio remains benign, with NPL ratio stable at 0.9% in 3Q17. Allowance coverage for the rest of portfolio stood at 115%, while total allowance coverage stood at 83%.
• Lastly, we note that the S$850m general provision (GP) drawdown has resulted in GP reserves roughly equivalent to MAS’s GP requirement of 1%. DBS estimates that FRS 109 requirements would translate into GP reserves of around 0.9%. 
• Come 1 Jan 2018F (when FRS 109 kicks in), DBS intends to transfer the remaining S$2.6bn GP reserves to non-distributable regulatory loss allowance reserves (RLAR).

Positive FY18F guidance 

• DBS guided for a positive FY18F, including: 
  1. Underlying loan growth of 7-8% in FY17-18F; 
  2. Income growth of c.3% yoy for FY17F and double-digit growth in FY18F; 
  3. Cost-to-income ratio of 43% for FY17F; expected to improve in FY18F; 
  4. Special provisions (SPs) in FY18F to be lower than through-the-cycle level of 27bp.
• Under FRS 109, we estimate that credit cost from stage 1 and 2 buckets under a benign credit environment would be theoretically lower than the combined GPs and SPs. We factor in total credit cost of 25bp for average loans in FY18F-19F.
• Also, we expect SPs of S$133m in 4QFY17F (largely attributable to non-oil & gas portfolio, which we deem stable). We expect NIM to improve to 1.83% in FY18F from 1.76% in FY17F.
• We derive a target FY18F P/BV multiple of 1.3x from our GGM valuation, which assumes FY19F ROE of 11.5%, 3.25% LTG and 9.6% COE. This compares to DBS’s historical 10-year average P/BV of 1.17x and forward ROE of 11%.

YEO Zhi Bin CIMB Research | http://research.itradecimb.com/ 2017-11-06

CIMB Research SGX Stock Analyst Report ADD Upgrade HOLD 25.00 Up 21.500