DBS Group - OCBC Investment 2017-11-06: Allowances Of S$815M

DBS Group - OCBC Investment 2017-11-06: ALLOWANCES OF S$815M DBS GROUP HOLDINGS LTD D05.SI


  • 3Q17 income grew.
  • But allowances dented bottomline.
  • Upped FV to S$23.52.

Healthy improvement in 3Q, dragged down by allowances 

  • DBS reported a sharp 25% YoY and 29% QoQ drop in 3Q17 net earnings to S$802m, and below Bloomberg consensus of S$1.14b. This was due to a spike in allowances, which rose from S$304m in 2Q17 to S$815m in 3Q17. Apart from this, its 3Q17 results were fairly healthy and in line with expectations. 
  • Net Interest Income rose 9% YoY and 5% QoQ to S$1975m, while Non-interest Income fell 3% YoY but is up 5% QoQ to S$1084m. Total income before allowances rose 3% YoY and 8% QoQ to S$1761m. 
  • Net Interest Margin (NIM) was fairly flat at 1.73%, down slightly from 1.74% in 2Q17. Cost-to-income ratio dropped to 41.1% for the quarter, giving a 9-mth ratio of 42.5% versus 43.0% for 9M16.

Taking the hit this quarter 

  • On allowances, management shared that its total exposure to the oil and gas support services industry amounted to S$5.3b, and taking into account the impending implementation of FRS109, it has accelerated the recognition of Non-Performing Assets (NPAs) with a matching increase in specific allowances. It drew on S$850m from general allowance reserve, resulting in a net allowance charge of S$815m. 
  • As of Sep 2017, its oil and gas support services NPAs amounted to S$3.0b, of which cumulative specific allowances of S$1.5b have been made. NPL rate rose from 1.5% in the previous quarter to 1.7% this quarter.

Strong price gains recently; downgrade to HOLD 

  • Management is guiding for loans growth of 7-8% this year and next. It expects double-digit topline growth for 2018, and better contribution from the ANZ merger. 
  • Higher SIBOR should also give NIM a lift. Management is still cautious about the outlook for the oil and gas sector. However, with the move to clean up its book, they do not expect to have to do further provisions. 
  • Since our upgrade on 14 Sep 2017 (refer to report titled “DBS Bank: Time to buy”), the stock has done well and closed at S$22.97 last Friday, up some 12.7% since midSeptember.
  • We have upped our fair value estimate from S$22.50 to S$23.52 based on 1.2x book. At current price, we downgrade our rating to HOLD, but will accumulate at S$22.00 or lower.

Carmen Lee OCBC Investment | http://www.ocbcresearch.com/ 2017-11-06
OCBC Investment SGX Stock Analyst Report HOLD Downgrade BUY 23.52 Up 22.500