DBS Group - CGS-CIMB Research 2018-08-03: Income Growth Target Seems Like A Tall Order

DBS Group - CGS-CIMB Research 2018-08-03: Income Growth Target Seems Like A Tall Order DBS GROUP HOLDINGS LTD SGX:D05

DBS Group - Income Growth Target Seems Like A Tall Order

  • DBS's 2Q18 core net profit of S$1.37bn was 5% below our expected S$1.45bn. Key miss from lower net trading income, which we expect to remain under pressure ahead.
  • NII +4.5% q-o-q to S$2.22bn. NIMS was up 2bp q-o-q to 1.85%. Loan growth was +3% q-o-q (1Q18: +1.6% q-o-q), mainly non-trade and from HK and Singapore.
  • Fees were down 5% q-o-q as wealth management shrank 9% q-o-q but offset by stronger cards (+10% q-o-q). ROE was 11.8% vs. 1Q18’s 13.1% (1H18: 12.5%).
  • Even the best bank cannot fight against market headwinds. With lower loan growth and trading income, we think the guided “double-digit” income growth is a tall order.
  • Downgrade to HOLD with a lower GGM Target Price of S$28 (lowered ROE from 14% to 13%). The strong capital position CET1 ratio at 13.6% leaves room for dividend upside.

Earnings miss, total income down 4.7% q-o-q, negative jaws

  • 2Q18 core net profit of S$1.37bn (+20% y-o-y, -10% q-o-q) formed 23% of our/consensus ull-year numbers (1H18: 49%) on lower net trading income. Total income dipped 4.7% q-o-q to S$3.2bn, while expenses remained flat, creating a negative jaw. PPOP was down 8.7% q-o-q to S$1.78bn. As a function of lower income, CIR crept up to 44.3% in 2Q18 (1Q18: 41.6%). Guidance of 43% remains. 
  • 1H18 interim DPS of 60Scts (1H17: 33Scts) came in-line. The CET1 ratio was 13.6% vs. 1Q18’s 14.4% (1H18:13.6%).

~ SGinvestors.io ~ Where SG investors share

Net interest income +4.5% q-o-q, loan book expands in HK and SG

  • 2Q18 NII (+4.5% q-o-q) was in line. Loans grew 3% q-o-q but in constant-currency terms, +1% q-o-q. Gross non-trade loans were up 3% q-o-q while trade loans were flattish at +1.8% q-o-q. HK was the star performer with gross loans up S$4.5bn (7.7% q-o-q), followed by Singapore (+S$4bn, 1.9% q-o-q). NIM expanded 2bps q-o-q: to 1.85% on higher SIBOR and HIBOR. 
  • The NIM pick-up was only 2bps (1Q18 5bps) as a result of higher deposit costs (+13bps q-o-q), which offset improving loan yields (13bps q-o-q).

Lower fees and 3-year low trading income

  • Fees fell 5% q-o-q to S$700m from the high base of wealth management fees and brokerage commissions in 1Q18. Trading income of S$227m (-38% q-o-q, -23% y-o-y) was at a 3-year low since 1Q15 (S$92m), which would see pressure in 2H18 against the backdrop of a flatter yield curve, widening credit spreads. 
  • Management expects c.S$250m/quarter of sustainable trading income (c.S$300m/quarter in the past 3 years).

12bps credit cost from vessel sale, no issue from developers

  • 2Q18 provisions were S$105m (-36% q-o-q). Credit costs were lower at 12bps (1Q18: 20bps) thanks to the sale of an oil & gas vessel. 
  • We think credit costs may surprise on the upside given such ad-hoc sales of vessels although the oil services sector has not seen a huge recovery. We pen in credit costs of 18bps and 21 bps for FY18F and FY19F, respectively, lower than the guided 25-27bps. 
  • Credit risk is low among developers in Singapore with strong balance sheet (c. 0.4-0.5x net gearing).

More cautious tone, lower loan growth expectations

  • Given the US-China trade war, the deleveraging in China, weakness in Asian currencies and potential spillover from Singapore property cooling measures (mainly lower LTV), DBS now expects loan growth to be 6-7% (from 8%) in FY18, offset by better 1-2 bps NIMS (from 1.85%) on two rate hikes. 
  • We now expect loan growth to be 6.9% and NIMS to be 1.88% (from 7.6% and 1.85% respectively).

At 1.4x P/BV, it is +1 s.d of long-term mean (1.2x)

  • Our EPS is cut by 0.8-6% for FY18-20F to reflect 2Q18 results. Our FY18F income growth is at 8.7% and we think share price upside could be capped at 1.4x P/BV vs. ROE of 12.5%. 
  • Upside/downside risks to our call is stronger loan growth and NIMS/ trade war.

Upside/downside risks to our forecasts/call

Upside risks

  • Higher trade loan growth and better margins. Trade loan growth was flattish at 1.8% q-o-q to S$50bn in 2Q18, mainly due to the inability to price up trade loans margins.
  • Market rebound that could cause net trading income to swing back to c.S$300m/quarter.
  • Wealth management surprise from more aggressive customer acquisition and strong inflow of net new money.
  • Divestment gains. Recall that DBS registered a c.S$86m gain from the divestment of one floor of the Center in HK.
  • Strong capital ratio could leave room for higher dividend.

Downside risks

  • Multiplier effects of a full-blown trade war beyond FY18F. We now expect loan growth of c. 5.6% and 5.2% in FY18F and FY19F, mainly factoring in lower loan growth in Singapore (5% and 4.2% respectively). Note that in 2015 and 2016, Singapore loan growth was only at 4.2% and 3.9% respectively when GDP was growing at c.1.9-2%. Our economist now expects GDP for 2018 to be 3.2%. HK’s loan growth pace could also be dampened.
  • Risk-off mode from wealth management limits sale of investment products.

Lim Siew Khee CGS-CIMB Research | https://research.itradecimb.com/ 2018-08-03
SGX Stock Analyst Report HOLD Downgrade ADD 28.00 Down 34.000