DBS Group Holdings (DBS SP) - UOB Kay Hian 2018-05-02: 1Q18 NIM And Wealth Management Up; Credit Costs Down

DBS Group Holdings (DBS SP) - UOB Kay Hian 2018-05-02: 1Q18 NIM And Wealth Management Up; Credit Costs Down DBS GROUP HOLDINGS LTD SGX: D05

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

  • DBS reported a stellar set of results with earnings up 21.4% y-o-y, driven by NIM expansion of 5bp q-o-q, wealth management fee expanding 49% y-o-y and credit costs normalising to 20bp.
  • The risk for interest rates remains on the upside as the US economy continues to register robust growth.
  • Final dividend of 60 S cents and special dividend of 50 S cents go ex on 3 May. Thus, investors’ current entry price is effectively lower at S$29.74.
  • Maintain BUY with a new target price of S$35.50.



RESULTS

  • DBS Group Holdings reported a net profit of S$1,511m for 1Q18, up 21.4% y-o-y. Earnings were 11.6% above our expectation of S$1,354m.
  • Corporate loans contributed to steady loan growth. Loan growth was healthy at 1.6% q-o-q and 9.9% y-o-y. The sequential increase in loans was driven by non-trade corporate loans for property projects in Singapore and Hong Kong and deal-related financing. The expansion in loans was at S$39b on a y-o-y basis, of which S$9b came from the consolidation of ANZ.
  • NIM expanded 5bp q-o-q and 9bp y-o-y to 1.83%, pushing growth in net interest income to 16.2% y-o-y. DBS benefitted from re-pricing of loans due to higher interest rates for S$-, US$- and HK$-dollar denominated loans, partially offset by higher cost of US$ and HK$ fixed deposits.
  • Stellar performance from wealth management. Fees grew 11.9% y-o-y despite 1Q17 being a high base. Contributions from wealth management and cards increased 49.1% and 26.8% y-o-y respectively. Contributions from cards were boosted by consolidation of ANZ’s operations in Taiwan and Indonesia.
  • Treasury income driven by customers’ flows. Net trading income increased 36.3% y-o-y to S$368m. DBS has recognised a net gain of S$86m on the disposal of a property in Hong Kong (one floor of The Center at 99 Queen's Road Central).
  • NPL formation was at a four-year low. New NPLs declined by 46% q-o-q and 63% y-o-y to S$195m. NPL balance declined 2.3% q-o-q while NPL ratio receded by 6bp q-o-q to 1.62%. Provisions declined by 18% y-o-y (excluding extra general provisions of S$350m “paid for” by divestment of PwC Building in 1Q17) and 27% q-o-q as pressure on asset quality from the oil & gas sector is already behind us.


STOCK IMPACT


Optimistic outlook.

  • Management maintained guidance for loan growth at 8% for 2018. DBS is on track to achieve a NIM of 1.85% for the full year (2017: 1.75%). Management is confident of achieving a ROE of 12.5% for 2018. ROE could reach as high as 13% if specific provisions fall below guidance of 20-25bp. Cost/income ratio should be maintained at about 43%.
  • Benefitted from strong sales for investment and bancassurance products. AUM has expanded 22% y-o-y to S$208b, of which S$22b came from the acquisition ANZ’s wealth management and retail banking businesses in Singapore and Hong Kong. DBS has also improved the productivity of relationship managers that came on board from ANZ due the broader range of investment products on its platform.
  • Hong Kong no longer the Achilles heel. Earnings contribution from Hong Kong increased 91% y-o-y to S$436m (up 66% if we exclude gains from disposal of property) in 1Q18. Loans grew 20% y-o-y while deposits grew 21% y-o-y. Hong Kong dollar- denominated current accounts expanded 26% y-o-y. DBS provided cash management services for large Chinese corporations operating in Hong Kong. Its wealth management and bancassurance businesses also achieved healthy growth.
  • Interest rates could surprise on the upside. Asset quality could be affected if interest rates are jacked up at a rapid pace. In that environment, SME loans would be more vulnerable while delinquencies for unsecured consumer lending could pick-up. Nevertheless, management expects asset quality for large corporations and residential mortgages to remain resilient.
  • Gaining traction in payment. 900,000 customers have downloaded DBS’ payment app PayLah!. DBS handles 50,000 PayLah! payment transactions per day, including 15,000 per day for payment of taxi fares. Management estimated that DBS has a market share of 24% for PayNow payments.


EARNINGS REVISION/RISK

  • We raise our net profit forecast for 2018 by 5.4% due to a higher NIM assumption of 1.83% (previous: 1.81%) and lower credit cost forecast of 22.5bp (previous: 28.2bp).


VALUATION/RECOMMENDATION

  • Upside risk for interest rates. The FED continues to monitor incoming data for signs of pick-up in inflation. While FED Chairman Jerome Powell maintained that he sees “no evidence that the US economy is overheating”, there are quarters within the FED that are concerned that we longer have slag in the labour market and wage inflation would pick up, necessitating a faster pace of hikes for the FED funds rate.
  • Maintain BUY. We roll over our valuation to 2019, a quarter ahead of our usual schedule. Our new target price of S$35.50 is based on 1.82x 2019F P/B, derived from the Gordon Growth Model (ROE: 12.5%, COE: 8.0% (Beta: 1.1x) and Growth: 2.5%).





Jonathan Koh CFA UOB Kay Hian | https://research.uobkayhian.com/ 2018-05-02
SGX Stock Analyst Report BUY Maintain BUY 35.50 Up 31.080



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