DBS - RHB Invest 2017-11-07: Accelerated Recognition Of NPAs

DBS - RHB Invest 2017-11-07: Accelerated Recognition Of NPAs DBS GROUP HOLDINGS LTD D05.SI

DBS - Accelerated Recognition Of NPAs

  • DBS Group's 3Q17 net profit of SGD802m was below expectations, accounting for 18% and 17% of our and consensus pre-results’ 2017 forecasts. 3Q17 allowances of SGD815m were more than double of 2Q17’s SGD304m, due to the oil & gas sector. 
  • Management guided that recognition of non- performing assets (NPAs) for the oil & gas sector is largely done. 
  • On a more positive note, total income rose 4.6% QoQ. 
  • We lower 2017F earnings and maintain our NEUTRAL recommendation, with a slight increase in TP to SGD21.45 (from SGD20.65, 6% downside).

We forecast NPL ratio of 1.6% by end-2018, from 3Q17’s 1.7%. 

  • Management has accelerated the recognition of NPAs for the oil & gas support services, of which half of the increase was due to two larger oil & gas players. Despite the recent strength in crude oil prices, the service support sector continues to see weak charter rates. 
  • Management sees deep sea drilling operations remaining weak, unless crude oil prices rise to ~USD100/bbl (vs current ~USD60/bbl). 
  • Whilst we are projecting NPL ratio to rise further to 1.8% by end-2017, we forecast a decline through 2018. Its 3Q17 credit cost (specific loan allowances) of 195bps was sharply higher than 2Q17’s 40bps. 
  • Going forward into 2018, management guided for credit cost of ~27bps. 3Q17’s LLC was 83%, down from 2Q17’s 100%. This is in comparison to its other two peers’ 3Q17 average of 104%.

Management guided NIM in future quarters to be generally wider. 

  • 3Q17’s NIM of 1.73% was marginally narrower than 2Q17’s 1.74%, due to lower interest rates. We believe future SIBOR/Singapore Swap Offer Rate(SOR) strength could help widen its 2018 NIM to 1.77% (vs 9M17’s 1.74%). 
  • 3Q17’s loan segment was 4% higher QoQ, driven by housing loans (DBS gained Singapore mortgage loan share). We project 2017 and 2018 loan growth of 7% and 5.5% respectively (stronger 2017 loan growth was partly due to the ANZ consolidation).

Results below expectations. 

  • 3Q17 net profit was SGD802m. Excluding one- time items (mainly the ANZ integration costs), 3Q17 core net profit of SGD822m was down 28% QoQ. 
  • 9M17 net profit of SGD3,177m represented 71% and 67% of our and consensus pre-results’ 2017 net profit forecasts respectively. Post results, we lower our 2017 net profit forecast by 6% to factor in weak 3Q17 earnings.
  • Our revised GGM-derived TP of SGD21.45 assumes a CoE of 9.5% and ROE of 10.6% (2016 ROE was 10.1%). Our TP implies 2017F and 2018F P/BVs of 1.15x and 1.08x respectively (close to its 4-year historical average of 1.05x).


  • Downside risks to our forecasts include higher-than-expected impairment charges and weaker-than-expected NIMs. The converse represents upside risks.

Leng Seng Choon CFA RHB Invest | http://www.rhbinvest.com.sg/ 2017-11-07
RHB Invest SGX Stock Analyst Report NEUTRAL Maintain NEUTRAL 21.45 Up 20.650