DBS Group Holdings (DBS SP) - UOB Kay Hian 2018-01-22: 4Q17 Results Preview ~ More Goodies From Second Review Of Dividend Policy

DBS Group Holdings (DBS SP) - UOB Kay Hian 2018-01-22: 4Q17 Results Preview ~ More Goodies From Second Review Of Dividend Policy DBS GROUP HOLDINGS LTD D05.SI

DBS Group Holdings (DBS SP) - 4Q17 Results Preview ~ More Goodies From Second Review Of Dividend Policy

  • We expect a strong net profit growth of 20.6% y-o-y driven by NIM expansion of 4bp yoy, double-digit growth in fees and lower credit costs. The positive impact from FRS 109 was already felt in 3Q17 and there was no further clean-up of NPLs in 4Q17.
  • Management will conduct a second review of its dividend policy as Basel III reform was finalised in Dec 17. 
  • Maintain BUY. Target price: S$29.50.



WHAT’S NEW


NIM continued to climb higher. 

  • We expect DBS Group Holdings’ (DBS) to report loan growth of 7.3% y-o-y and 2.8% q-o-q in 4Q17. The sequential expansion was broad-based and driven by corporate loans, trade loans and residential mortgages. 
  • We expect NIM to edge up 2bp q-o-q to 1.75% due to the turnaround in SIBOR and SOR since 3Q17.

Double-digit growth in fee income. 

  • We expect fees to increase 25% y-o-y (low base in 4Q16 due to weakness in wealth management) but to fall 6% q-o-q on seasonality. The strong y-o-y growth would have been driven by wealth management and credit cards. On a sequential basis, wealth management and loans-related fees were seasonally softer.
  • We expect net trading income to be seasonally lower at S$150m (3Q17: S$265m).

Seasonal up-tick in cost-to-income ratio. 

  • Cost-to-income ratio could be at 44% (3Q17: 41.8%) due to seasonal weakness in operating income.

Positive impact from FRS 109 already felt in 3Q17. 

  • DBS has cleaned up its books and already utilised its surplus general provisions in 3Q17. We expect NPL formation to ease and NPL ratio to stabilise at 1.74% in 4Q17 after kitchen sinking in 3Q17. 
  • Specific provisions could have declined 39% y-o-y to S$262m. We expect credit cost to recede to 38.6bp in 4Q17 (3Q17: 104.1bp).

A second review of dividend policy. 

  • We expect management to review DBS’ dividend policy, given that Basel III reforms were finalised in Dec 17. DBS has a robust fully loaded CET-1 CAR of 13.6%. We expect management to disclose the new dividend policy when DBS announces 4Q17 results on 8 Feb 18.


STOCK IMPACT

  • Continuing to demonstrate consistency in execution. We forecast net profit of S$1,101m for 4Q17, up 20.6% y-o-y and 37.3% q-o-q. 
  • The solid y-o-y growth would have been driven by NIM expansion of 4bp y-o-y, double-digit growth in fees and lower credit costs.


EARNINGS REVISION/RISK

  • We maintain our existing earnings forecasts.


VALUATION/RECOMMENDATION

  • Maintain BUY. Our target price is S$29.50, based on 1.56x 2018F P/B, derived from the Gordon Growth Model (ROE: 10.8%, COE: 8.0% (beta: 1.1x, growth: 3.0%).



SHARE PRICE CATALYST

  • NIM expansion from higher interest rates in Singapore and Hong Kong.
  • Improvement in cost-to-income ratio due to digitalisation and strategic cost management initiatives.
  • Growth from overseas markets, such as China, Hong Kong, India, Indonesia and Taiwan, including initiatives in digital banking.




Jonathan Koh CFA UOB Kay Hian | http://research.uobkayhian.com/ 2018-01-22
SGX Stock Analyst Report BUY Maintain BUY 29.300 Same 29.300



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