DBS Group Holdings Ltd - Phillip Securities 2017-12-18: Poised To Outperform

DBS Group Holdings Ltd - Phillip Securities 2017-12-18: Poised To Outperform DBS GROUP HOLDINGS LTD D05.SI

DBS Group Holdings Ltd - Poised To Outperform

  • NIM will likely expand 15bps to 20bps to reach c.1.9% in FY18 as benchmark rates rise in its key markets.
  • Digital capabilities will significantly reduce cost to income ratios compared to past performance in previous economic cycles.
  • Expect DBS’ FY18 ROE to reach c.13% on the back of higher loans volume, better lending spreads and normalisation of credit costs.
  • Maintain BUY rating with target price of S$29.30.



INVESTMENT MERITS / OUTLOOK 


1. Rising benchmark rates and robust loans growth in Hong Kong and Singapore will drive DBS’ NII in FY18. 

  • In December, the Hong Kong Monetary Authority increased the base lending rate by 25bps to 1.75% following a 25bps increase in the Fed Funds rate. The Federal Reserve is expected raise the Fed Funds rate 3 times in FY18. 
  • HIBOR is expected to track the rise of base lending rates closely and will lead to upward pressure on margin DBS’s Hong Kong-based loans. 
  • SIBOR demonstrated stronger correlation to Fed Funds rate in 2H17, we expect the correlation to continue with the assumption that the synchronous global economic growth continues, and macro volatility remains low. 
  • Singapore and Hong Kong-based loans account for c.63% of DBS’ gross loans therefore sensitive to the rates growth in these locations.

2. Digitally enabled clients are more profitable and are more cost-efficient to maintain. 

  • In our DBS 2017 Investor Day report, we described how digitally engaged clients are more profitable. The digital enablement has raised DBS’ operating leverage and will drive more incremental returns as client activities ramp up amid improving investment sentiments.

3. India’s domestic conditions are highly favourable for India digibank operations as it rolls out key banking products in FY18. 

  • The conditions are particularly favourable for digital push into India because of the mandatory Aadhaar system to all the residents of India and the ongoing banknote de-monetisation. In addition, DBS has the appropriate leadership in place and has the first mover advantage into a large Indian population that is young and IT savvy. 
  • We believe that the rollout of key banking products (unsecured loans, remittance, insurance and credit cards) in FY18 will gain further traction in this market.

4. Major clean up in 3Q17 paves the way for credit cost to normalise in FY18. 

  • By 3Q17, 57% (c.S$3bn) of the DBS’ S$5.3bn offshore Oil & Gas exposure has been recognised as non-performing assets (NPA). In addition, 50% of that S$3bn NPA has been provided for through the aggressive specific provision expense in 3Q17. 
  • Given that the collateral values of the offshore assets are already beaten down to 25% of its original valuation, we believe that further downside is limited and the provision cover of 50% of offshore oil and gas NPA provides sufficient buffer.


RECOMMENDATION 


  • Maintain BUY rating with a target price of S$29.30 based on Gordon Growth Model.








Jeremy Teong Phillip Securities | http://www.poems.com.sg/ 2017-12-18
Phillip Securities SGX Stock Analyst Report BUY Maintain BUY 29.300 Same 29.300



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