DBS Group - CIMB Research 2018-04-30: 1Q18 When All Stars Align

DBS GROUP HOLDINGS LTD D05.SI

DBS Group - 1Q18 When All Stars Align

DBS Group's 1Q18 core net profit of S$1,521m (+26% y-o-y) was slightly ahead of consensus and our expectations, at 26% of our full-year forecast.
Key positives for the quarter sprang from higher-than-expected NIM expansion of 5bp q-o-q and lower-than-expected credit costs (20bp of loans).
With upside risks well understood, we felt that investors’ mindsets have now turned to “what can go wrong?”.
We think DBS’s SME and consumer book remains sound; we would be watchful on the technology supply chain, given rising trade tensions.

That said, we are still in a healthy credit cycle. Maintain ADD on DBS with higher Target Price.

1Q18 core earnings growth of 26% precisely demonstrate why all the stars are aligned for DBS as interest rates and allowances charges revert to more normalised levels.
Sustained business momentum was underscored by broad-based growth in loans and fees while continued productivity improvements resulted in a positive jaw.
Asset quality was benign with new NPA formation at a 4-year low. DBS achieved an ROE of 13.1%, the highest in a decade.

NII increased 16% y-o-y as NIM expanded 5bp q-o-q/9bp y-o-y to 1.83%. We now expect NIM to climb 10bp y-o-y to average 1.85% for FY18F (previously +8bp y-o-y).
1Q18 loan yields expanded 15bp q-o-q while cost of deposits increased 10bp. Additionally, gross loans increased 2% pt q-o-q (including S$1bn from ANZ), driven by property loans in SG and HK.
DBS guided for 8% loan growth for FY18F.

Fees increased 12% y-o-y on higher WM (+49% y-o-y) and card fees (+27% y-o-y). Other non-II decreased 34% y-o-y due to gain from disposal of PWC building in 1Q17.
We note that there was a gain of S$86m in 1Q18 from divestment of one floor of The Center in HK.
Encouragingly, net trading income reversed its downward trend. There was a positive jaw with CIR falling to 41.6% (1Q17: 43.2%). Excluding ANZ, expenses were only up 6% y-o-y (+12% including ANZ).
Meanwhile, total income was up 16% y-o-y.

Asset quality was healthy, with NPA formation at a 4-year low (S$195m vs. usual run-rate of c.S$300m). NPA allowance coverage improved to 90bp of loans (4Q17:85bp) while NPL ratio dipped to 1.6% (4Q17: 1.7%).
Total credit costs were 18% y-o-y lower or 20bp of loans vs. through-the-cycle average of 27bp. Credit costs taken in were charges for existing NPLs.

Fully phased-in CET1 ratio remained at 14% but we expect it to normalise to 13% after the payout of FY17’s final and special DPS of S$1.10.
Deposits growth was in line with loan growth at 2% pt q-o-q; LDR stood at 87.3%.

We raise our FY18-20F EPS by 2.6-3.4% on higher NIM, lower credit costs and expenses. Accordingly, we raise our GGM-TP to S$34 (implied 1.8x FY18 P/BV) as we input a higher sustainable ROE of 14% (previously 13.5%).
With the stock well-owned, we feel investors’ focus has now turned to possible downside risks. Apart from rising delinquencies from DBS’s consumer and SME book, we would be watchful of the technology supply chain, given rising trade tensions. That said, we are still in a healthy credit cycle.

In terms of business units, consumer banking/wealth management income rose by 17% y-o-y, led by investment products and cards. Wealth management segment rose 28% with AUM increasing 22% y-o-y to S$208bn. DBS leadership-market share of housing loans and Singapore dollar-savings stood at 31% and 52% respectively. Institutional banking income grew 3% y-o-y mainly due to higher cash management income (+40% y-o-y) which offset declines in other products. Lastly, treasury-related income for treasury markets rose 33% y-o-y.
Excluding property gains of S$86m, Hong Kong earnings were also at a record (+66% y-o-y in constant-currency terms), with total income up 31% y-o-y due mainly to a 20% y-o-y increase in loans, +10bp y-o-y increase in NIM to 1.87% and non-II growth.

YEO Zhi Bin CIMB Research | http://research.itradecimb.com/ 2018-04-30

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