DBS Group Holdings (DBS SP) - UOB Kay Hian 2018-04-19: 1Q18 Earnings Preview ~ NIM And Wealth Management Up; Credit Costs Down

DBS Group Holdings (DBS SP) - UOB Kay Hian 2018-04-19: 1Q18 Earnings Preview: NIM And Wealth Management Up; Credit Costs Down DBS GROUP HOLDINGS LTD D05.SI

DBS Group Holdings (DBS SP) - 1Q18 Earnings Preview: NIM And Wealth Management Up; Credit Costs Down

  • We expect DBS’ 1Q18 results to be characterised by NIM expansion of 5bp y-o-y and continued growth in fees from wealth management, which expanded 12.6% y-o-y to S$250m despite a high base for 1Q17. 
  • With NPL formation for exposure to the oil & gas sector out of the way, we expect lower credit costs of 28.3bp compared with 72.3bp last year. 
  • Maintain BUY. Target price: S$31.08.



WHAT’S NEW


A good start for 2018. 

  • Loan growth was healthy at 10.4% y-o-y and 2% q-o-q for 1Q18, on track to hit management’s guidance of 8% for the full year. The broad-based expansion was driven by corporate loans, trade loans and residential mortgages.

Rising SIBOR and SOR augur well for NIM expansion. 

  • NIM is on an upward trend due to the steady rise in SIBOR and SOR. We expect NIM to expand 5bp y-o-y and 1bp q-o-q to 1.79%. We expect net interest income to grow at double-digit rate of 16.6% y-o-y.

Wealth management remains strong. 

  • We expect fees to grow 7.2% y-o-y driven by wealth management and augmented by organic growth from loans and trade related fees.
  • Fees from credit cards should have grown y-o-y due to acquisition of ANZ’s wealth management and retail banking businesses in Singapore and Hong Kong.

Healthy growth for non-interest income. 

  • We expect healthy growth and seasonally stronger contribution for net trading income at S$300m.

Improved cost efficiency. 

  • We expect cost-to-income ratio to have improved by 0.6ppt yoy to 42.9% in 1Q18, in line with management’s guidance of 43% for full-year 2018.

Asset quality stable. 

  • We expect NPL formation to be benign and NPL ratio to be stable at 1.69%. We have conservatively imputed credit costs of 28.3bp, which is towards the higher end of management guidance for specific provisions at 20-25bp.



STOCK IMPACT


Credit costs ease as DBS sails through the turbulence from Oil & Gas. 

  • We expect net profit to increase 8.8% y-o-y to S$1,354m for 1Q18, despite high base with divestment gain from sale of PWC Building for 1Q17, due to growth in net interest income and lower credit costs. 
  • We expect net profit to rebound 12.2% q-o-q due to seasonal strengthening in net trading income and continued growth in fees from wealth management.

Monetary policy reverts to tightening. 

  • MAS has decided to increase slightly the slope for the S$ nominal effective exchange rate (NEER) policy band from the existing 0%.
  • MAS reduced the rate of appreciation for S$ in Oct 15 and moved to a 0% appreciation policy in Apr 16. Subsequently, SIBOR and SOR eased in 2016. Thus, we believe that a reversal back to a policy of gradual appreciation would be positive for transmission of higher US FED Fund rate to higher SIBOR and SOR.

3-month SIBOR is currently at 1.50%. 

  • 3-month SOR has increased by 27bp on an ytd basis to 1.38%. We expect less drastic volatilities for SIBOR and SOR now that monetary policy has reverted back to gradual appreciation for S$ NEER. 
  • UOB Global Economics & Markets Research expects 3-month SIBOR and 3-month SOR to reach 1.85% and 1.65% respectively by end-18.

Biggest beneficiary of interest rate upcycle. 

  • DBS has an overwhelming competitive advantage in Singapore dollar-denominated loans, which accounted for 41.1% of total loans, due to its Singapore dollar-CASA ratio at 90.2% (savings accounts: 73.2%, current accounts: 17%). 
  • DBS’ market share for Singapore dollar-denominated savings accounts has been stable at 52%. It does not need to chase for high-cost fixed deposits, which accounted for a smaller 9.7% of its total deposits in Singapore dollars.


EARNINGS REVISION/RISK

  • We have raised our net profit forecast for 2018 by 2.1% as we adjusted credit costs lower at 28.2bp, compared with the previous 30.2bp.


VALUATION/RECOMMENDATION

  • Maintain BUY. 
  • Our target price for DBS of S$31.08 is based on 1.70x 2018F P/B, which is derived from the Gordon Growth Model (ROE: 11.5%, COE: 8.0% (Beta: 1.1x) and 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/ 2018-04-19
SGX Stock Analyst Report BUY Maintain BUY 31.08 Up 30.400



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