DBS Group (DBS SP) - Maybank Kim Eng 2017-11-07: Look Beyond 2017

DBS Group (DBS SP) - Maybank Kim Eng 2017-11-07: Look Beyond 2017 DBS GROUP HOLDINGS LTD D05.SI

DBS Group (DBS SP) - Look Beyond 2017

3Q17 miss on kitchen sink provisions; But healthy growth momentum; FY18-19E EPS raised 

  • DBS Group's 3Q17 core PATMI of SGD0.8b (-29% QoQ, -25% YoY) was below ours and Bloomberg consensus expectations. 9M17 core PATMI of SGD3.1b met 63% of our previous FY17 forecast. 
  • We cut our FY17E net profit by 8% to factor in higher provisions, but raised FY18-19E net profit by 6-8% on higher income, and lower expenses and provisions. 
  • With the change in EPS forecasts, our assumed sustainable ROE is now 11.6% (11.1% previously), COE 10.5%, and growth rate 3.5% (both unchanged). 
  • Our TP is raised by 6% to SGD22.75 based on ~1.2x FY18E P/BV (from 1.1x), inline with its 10-year mean. 
  • We prefer UOB (UOB SP,  Rating: BUY, Target Price: SGD27.10, see report: United Overseas Bank (UOB SP) - Steady And Consistent) due to its disciplined pricing strategy, sensitivity to re-pricing intervals and lowest exposure to O&G sector.

“Kitchen sinking” the provisions 

  • Worsening asset quality from the O&G support services sector continued to drag returns. In view of the upcoming IFRS 9 rule, the bank took the opportunity to recognize another SGD1.7b of new NPAs in the OSV sector, providing more specific provisions (SPs) and utilising the excess general provisions (GP) it has built (draw down SGD850m). 
  • The new NPAs of SGD1.7b were equally split between the larger 5 names and smaller name accounts. With the chunky exposures recognised as NPAs and provided for, we cut FY18-19E provisions by 20-24%, barring any significant deterioration in other sectors. 
  • Our FY17-19E credit costs are now 25-48bps (from 32-40bps).

Positive indicators 

  • Management remained optimistic on business momentum. We further raised our FY18-19E loan growth to ~7-8% (from ~5-6%) due to the improving economic environment. Customer spreads improved to 2.07% (2Q17: 2.03%), as lending yields rose. 
  • We expect modest NIM upside in FY18-19E to 1.78-1.80% given its sensitivity to re-pricing intervals for SGD interest rates.

Maintain HOLD 

  • With our TP offering less than 10% upside to the current share price, maintain HOLD. 
  • Risks to our call are:
    1. NIM improvement from higher rates;
    2. higher non-interest income; and
    3. lower provisions.

Revisions to estimates 

  • We reduced FY17E net profit by 8% mainly due to the 42% increase in provisions to SGD1.5b largely because of the OSV sector. 
  • We raised FY18- 19E core net profit by 6-8% mainly on:
    1. higher loan growth of 7-8% (from 5-6%);
    2. 1-3% lower expenses as we think its digitalization initiatives should improve overall cost efficiency; and
    3. lowered provisions by 20- 24% as most chunky exposures should have been provided for in FY17E.
  • Our FY17-19E credit costs are now 25-48bps (from 32-40bps).

3Q17 results snapshot 

  • 3Q17 core PATMI of SGD801m (-29% QoQ, -25% YoY) is below ours and Bloomberg consensus estimates by 33%/30% at SGD1.19b and SGD1.14b respectively. 9M17 core PATMI of SGD3.1b (-6% YoY) met 63% of our previous FY17 forecast. The variance lies in higher provisions of SGD815m ( > 100% QoQ, +87% YoY), with higher SP of SGD1.7b largely from OSV sector cushioned by write-back of general provision (GP) of SGD850m.
  • That aside, top line growth has been supported by higher interest income (+5% QoQ, +9% YoY), driven by broad-based loan growth at +4% QoQ/+8% YoY (including integration of ANZ) in constant currency terms. Customer spreads improved 4bps QoQ to 2.07% from higher lending yields. Noninterest income (+5% QoQ, -3% YoY) was supported by higher fees and commission income, which was offset by lower trading income.
  • Management is optimistic about business momentum and guided FY17-18E loan growth to be 7-8% (previous guidance for FY17E was mid-single digit growth), cost-income ratio of 43% in FY17E, and SP/loans for FY18E to be lower than 27bps.

Ng Li Hiang Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2017-11-07
Maybank Kim Eng SGX Stock Analyst Report HOLD Maintain HOLD 22.75 Up 21.500