DBS - RHB Invest 2018-05-02: Strong Nim Expansion From Higher Interest Rates

DBS - RHB Invest 2018-05-02: Strong Nim Expansion From Higher Interest Rates DBS GROUP HOLDINGS LTD SGX: D05

DBS - Strong Nim Expansion From Higher Interest Rates

  • DBS’ 1Q18 net profit slightly exceeded expectations. Its core net profit grew 26% y-o-y (+25% q-o-q) to SGD1.52bn, at 28% of our pre-results 2018 estimate.
  • Positives include 1Q18 NIM widening 5bps q-o-q to 1.83% (from higher SGD interest rates). However, 1Q18 net interest income expanded by only 1% q-o-q.
  • We lift our 2018F net profit by 6% to SGD5.67bn, mainly on a higher NIM assumption.
  • We also raise our GGM-derived Target Price to SGD29.60 (from SGD27, 4% downside) as we increase our ROE assumption to 12.9% (from 12.7%). Maintain NEUTRAL.

1Q18 net profit stood at SGD1.51bn, which was up 27% q-o-q and 21% y-o-y.

  • Excluding one-time items (mainly from ANZ integration costs), core net profit would have been slightly higher, at SGD1.52bn. If we strip out the gain of SGD86m from the divestment of a Hong Kong property, adjusted net profit would be 27% of our pre-results 2018 estimate.

Expect NIM to widen further in subsequent quarters.

  • Its 1Q18 NIM of 1.83% was 5bps wider q-o-q, and 9bps wider y-o-y. 
  • We raise our 2018F NIM to 1.85% (from 1.82%), as we factor in wider NIMs (1Q18: +9bps q-o-q to 1.87%) from Hong Kong, and further expansion of NIM in Singapore.

We raise our 2018F net interest income growth to 8.7%,

  • ... from 7.6% previously. This factors in 2018F loan growth of 8%. DBS’ 1Q18 sequential loan growth of 1.6% (+10% y-o-y) is in line with our forecast. 
  • Financial institutions, investment and holding companies loans (6% loan share) grew 16% q-o-q. DBS has a 31% Singapore’s housing loan market share.

1Q18 fee and commission income rose 12% y-o-y.

  • A contributor is the wealth management segment, where income surged 28% y-o-y to SGD663m – assets under management rose 22% y-o-y to SGD208bn.

1Q18 CIR of 41.6% was a clear improvement over 4Q17’s 44.4%,

  • ... as expenses grew slower than total income. Management is guiding for its CIR to be around 43%.

We raise our long term ROE assumption to 12.9%...

  • ... (from 12.7%) on the back of improving NIMs from both its Singapore and Hong Kong operations. 
  • Our CoE assumption is 9.6%. This yields a target P/E of 1.51x, which is higher than the 5-year historical average of 1.17x. Correspondingly, our GGM-derived Target Price is boosted to SGD29.60
  • DBS is going ex-dividend on 3 May (with a final DPS of SGD0.60, and special DPS of SGD0.50). Note that our Target Price is on an ex-dividend basis.

Positives are priced in.

  • Whilst DBS is a beneficiary of future increases in the Singapore Interbank Offered Rate (SIBOR), we believe the positives have been largely priced in. 
  • DBS currently trades at almost a 1.6x P/BV, which is more than 2SD above the historical average of 1.17x. Whilst there is a share price upside potential, any news flow on delays to the Federal Funds Rate (FFR) hike could lead to share price weakness.

Leng Seng Choon CFA RHB Invest | https://www.rhbinvest.com.sg/ 2018-05-02
SGX Stock Analyst Report NEUTRAL Maintain NEUTRAL 29.60 Up 27.000