DBS Group Holdings - UOB Kay Hian 2018-07-18: 2Q18 Results Preview ~ Robust Loans Growth; Benign Asset Quality

DBS Group Holdings (DBS) - UOB Kay Hian Research 2018-07-18: 2q18 Results Preview ~ Robust Loans Growth; Benign Asset Quality DBS GROUP HOLDINGS LTD SGX:D05

DBS Group Holdings (DBS) - 2Q18 Results Preview ~ Robust Loans Growth; Benign Asset Quality

  • We expect DBS to report a net profit of S$1,414m for 2Q18, increasing 25.1% y-o-y but receding 6.4% q-o-q.
  • We expect moderate NIM expansion of 3bp q-o-q. However, wealth management fees declined 9.4% q-o-q due to increased risk aversion towards the latter half of 2Q18.
  • We expect credit costs to have remained low at 21bp in 2Q18 as asset quality was benign (substantial clean-up of NPLs and hefty provisions already undertaken in 2H17).
  • Maintain BUY. Target price: S$28.95.



WHAT’S NEW


Benefitting from strong demand for corporate loans.

  • Loan growth was healthy at 11% y-o-y and 2.5% q-o-q for 2Q18, in line with guidance of 8% (constant currency) for the full year. SG. We expect broad-based expansion driven by corporate loans, trade loans and residential mortgages. 
  • Both the US dollar and Hong Kong dollar strengthened 3.8% in 2Q18 against the Singapore dollar, which is positive for loan growth when translated back to Singapore dollars.

Rising tide of SIBOR and SOR lifts NIM.

  • NIM has maintained a gradual upward trend due to the steady rise in SIBOR and SOR, in tandem with successive hikes in Fed fund rate. investors. We expect NIM to have expanded by a moderate 3bp q-o-q to 1.85%, which nevertheless represents robust expansion of 11bp on a y-o-y basis. 
  • We expect net interest income to have grown at double-digit rate of 16.9% y-o-y to S$2,208m.

Wealth management fees succumb to risk aversion in June.

  • We expect wealth management fees to have receded 9.4% q-o-q, due to increased risk aversion towards the latter half of 2Q18, but to have maintained positive growth of 22.4% y-o-y. io. We expect healthy organic growth from loans and trade-related fees. 
  • Overall, we expect fees and commissions to have increased 14.6% y-o-y but contracted 2% q-o-q.

Non-interest income moderates from high base in 1Q18.

  • We expect net trading income to have moderated to S$280m compared to a seasonally stronger S$368m in 1Q18.

Improved cost efficiency.

  • We expect cost-to-income ratio to have improved by 0.5ppt y-o-y to 43.3% in 2Q18, in line with management’s guidance of 43% for the full-year of 2018.

Stable asset quality.

  • We expect asset quality to have been benign in 2Q18. NPL ratio should have been stable at 1.59%. We have imputed low credit costs of 21bp (1Q18: 20bp) as DBS has already cleaned-up NPLs and put in substantial provisions in 2H17.


STOCK IMPACT


NIM expanded, but credit costs contracted.

  • We expect DBS to report a net profit of S$1,414m for 2Q18, increasing 25.1% y-o-y but receding 6.4% q-o-q. The good results are expected to be driven by strong y-o-y growth in net interest income coupled with a significant drop in credit costs.

More interest rate hikes in 2H18.

  • According to Fed Chairman Jerome Powell, the case for a continuation of a gradual pace of interest rate hikes is strong.

Biggest beneficiary of interest rate upcycle.

  • DBS has an overwhelming competitive advantage in Singapore dollar-denominated loans, which accounted for 41.3% of total loans, due to its Singapore dollar-CASA ratio at 91.5% (savings accounts: 73.6%, current accounts: 17.9%). 


EARNINGS REVISION/RISK

  • We reduced our net profit forecast by 1% for 2018 and by 0.8% for 2019 as we tweaked our assumptions for credit costs slightly higher to 23.1bp for 2018 (previous: 22.5bp) and 25.2bp for 2019 (previous: 23.2bp).


VALUATION/RECOMMENDATION


Maintain BUY.

  • Our target price for DBS of S$28.95 is based on 1.58x 2018F P/B, which is derived from the Gordon Growth Model (ROE: 11.9%, COE: 8.25% (Beta: 1.1x) and Growth: 2.0%).


SHARE PRICE CATALYST

  • NIM expansion from higher interest rates in Singapore and Hong Kong.
  • Improvement in cost/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 Research | https://research.uobkayhian.com/ 2018-07-18
SGX Stock Analyst Report BUY Maintain BUY 28.95 Down 30.150



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