DBS Group - Maybank Kim Eng 2018-05-02: Solid Outlook But Fairly Valued

DBS Group - Maybank Kim Eng 2018-05-02: Solid Outlook But Fairly Valued DBS GROUP HOLDINGS LTD SGX: D05

DBS Group - Solid Outlook But Fairly Valued


Growth story intact

  • The 1Q18 results demonstrate DBS’s ability to generate earnings growth in the current business environment. However, following DBS share price's 24% YTD increase, we find the shares fairly valued on our revised estimates. 
  • Reported 1Q18 earnings beat Bloomberg consensus, but were in-line after stripping out a SGD86m gain from the divestment of a Hong Kong property. 1Q18 core PATMI of SGD1.4b (+19.8% q-o-q, +18.6% y-o-y) met our expectation at 22% of our previous FY18E forecast. 
  • Because of a higher interest rate outlook, we have lifted our net profit estimates for FY19/20E by 4%/5%, sustainable ROE by 14.7% from 14.3%, but left unchanged our COE at 10.5% and growth 3.5%. As a result, our Target Price is slightly raised to SGD30.80 based on 1.6x FY18E P/BV (unchanged), close to 2SD above its historical mean of 1.2x to reflect higher ROEs.



Active liability management, NIMs to expand

  • We raised net interest income by 2-5% for FY18-20E after factoring in a higher SIBOR forecast in FY18/19E of 1.65%/1.90% (from 1.55%/1.75% previously) per our Singapore economist. 
  • While interest rates have increased, DBS’s funding cost for customer deposits has not significantly widened, reflecting its active liability management. Between 1Q15 and 1Q18, SIBOR/LIBOR/HIBOR increased 63/166/81bps respectively, but DBS’s funding cost rose by 5bps. 
  • With repricing intervals working their way through and funding costs manageable, we estimate NIMs will expand to 1.85%/1.92%/1.96% for FY18-20E from 1.81%/1.84%1.88% previously.


Benign credit environment

  • 1Q’s SP/loans fell to 20bps (4Q17: 25bps, 1Q17: 26bps). We raised allowances by 4-25% for FY18-20E assuming gradual rate hikes, and estimate credit costs at 17-20bps. We assume a benign credit environment with no significant asset quality deterioration given the improvement in FCF for corporates. 
  • For every 10bps increase in credit costs, we estimate net profit during FY18-20E may decline by ~5%.


Maintain HOLD; Shares fairly valued

  • Maintain HOLD as the shares are fairly valued. However, healthy dividend yields of ~4% should lend support to DBS share price
  • Key risks to our call:
    1. lower revenue;
    2. higher costs; and
    3. higher allowances.


Swing Factors


Upside

  • 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.

Downside

  • 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.





Ng Li Hiang Maybank Kim Eng | https://www.maybank-ke.com.sg/ 2018-05-02
SGX Stock Analyst Report HOLD Maintain HOLD 30.80 Up 29.660



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