DBS Group (DBS SP) - Maybank Kim Eng 2018-02-09: A Strong Franchise

DBS GROUP HOLDINGS LTD D05.SI

DBS Group (DBS SP) - A Strong Franchise

Post-results, we remain positive on DBS’s ability to generate robust earnings growth. While FY17 results missed our expectation on lower income and higher provisions, the core business remains solid, i.e. higher net interest income (+7% y-o-y) and net fee and commission income (+12% YoY).
We expect cost efficiency gains from its ongoing digitalisation efforts (i.e. branch distribution network, data architecture, and shift to “digital” customers).
We revise estimates with sustainable ROE now 14.3% (11.6% previously), COE 10.5% and growth 3.5% (unchanged). Our Target Price is raised 30% to SGD29.66 based on ~1.6x FY18E P/BV (from 1.2x previously), slightly above 1.5SD above its historical mean of 1.2x for higher ROEs.
We like DBS for its strong earnings growth and healthy yields. Given DBS's sharp share price appreciation of 5.3% yesterday, we maintain HOLD for now but would accumulate at lower levels.

We now expect total income to grow at a 3-year CAGR of ~12% (vs. ~6% for Bloomberg consensus currently and ~7% from our previous estimates) on the back of:
1. higher loan growth (~9% vs 7-8% previously) from a broad-based economic recovery and rebound in Singapore property;
2. re-pricing intervals from higher rates;
3. increased fee and commission income from higher wealth management fees and higher transaction services.
We also expect credit costs to ease to 13-20bps for FY18-20E, with asset quality no longer a concern in O&G sector.

Management declared a final one-tier dividend of SGD0.60/sh and special dividend of SGD0.50/sh, which brings total FY17 dividends to SGD1.43/sh (SGD0.33/sh for interim dividend). This is higher than our expectation of SGD0.63/sh.
With fully-loaded CET1 capital at 13.9%, which is above comfort level of 12.5%, DBS will be paying FY18E dividends of SGD1.20/sh.
While DBS does not provide guidance on its payout, we think there is scope for capital management, and have thus raised our FY19- 20E DPS to SGD1.20/sh (from SGD0.60/sh previously).
Yields are 4.5% in FY18-20E, higher than peers’ ~3-3.5% currently.

With 11% upside, we maintain HOLD. DBS’s strong franchise can deliver robust earnings and decent yields.
Key risks to our call:
1. lower revenue;
2. higher costs; and
3. higher provisions.
DBS has been gaining market share in mortgage loans in Singapore (30.8% in Dec’17 vs 28.7% in Dec’16). We have baked into our forecast a 35/20/25bps increase in 3M SIBOR in line with our Singapore economist’s SIBOR forecasts of 1.55%/1.75% for FY18/19E). Also, organic growth in AUM has been solid (+13% y-o-y ex-ANZ).
With asset-quality deterioration no longer a major concern for its O&G exposures, we expect credit costs to ease to 13-20bps for FY18-20E. For every 10bps increase in credit costs, we est. FY18-20E net profits could decline by ~5%.

Ability to reprice loans at higher interest rates and lower costs of funding, from large pool of CASA deposits.
Higher non-interest income from wealth-management and Manulife bancassurance businesses.
Sharp and sustained rebound in commodity prices.
Asset quality better than expected with no major credit slippages and proactive loan restructuring.
Higher demand for domestic mortgages from easing of cooling measures.
Translation benefits from appreciation of USD/HKD.

Highest asset-quality risks from exposure to North and South Asia and O&G sector.
Sharp decline in the value of securities and shocks in fixed-income portfolio.
Job losses in Singapore become pervasive, hurting mortgage portfolio.
Lack of liquidity of a funding currency.
Emergence of dominant financial competitor in Singapore.
Capital-raising by peers.

Ng Li Hiang Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2018-02-09

Maybank Kim Eng SGX Stock Analyst Report HOLD Maintain HOLD 29.66 Up 22.750