DBS Group Holdings - UOB Kay Hian 2018-08-03: 2Q18 Trade Tension Affects Trade Loans & Sentiments; Downgrade To HOLD

DBS GROUP HOLDINGS LTD SGX:D05

DBS Group Holdings - 2Q18 Trade Tension Affects Trade Loans And Sentiments; Downgrade To Hold

DBS’ 2Q18 results were marginally below expectations due to softer non-interest income. Management has toned down guidance for loan growth in 2018 from 8% to 6-7% as heightened uncertainty from the escalation in US-China trade tension would affect trade loans. Contributions from net trading income could also be affected due to negative sentiments in financial markets.
Downgrade DBS to HOLD due to limited price upside and heightened uncertainty.
Target price: S$28.20. Entry price: S$25.50.

DBS Group Holdings (DBS) reported net profit of S$1,334m (+18.1% y-o-y) in 2Q18, marginally below our forecast of S$1,414m. Non-interest income was softer than anticipated, partially offset by lower credit cost. There were also one-off cost items totalling S$38m (re-measurement of deferred taxes due to conversion of India branch to wholly-owned subsidiary: S$34m, ANZ integration costs: S$4m).

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Loan growth was robust at 11.5% y-o-y and 2.9% q-o-q, driven by non-trade corporate loans and consumer loans. US$ and HK$ loans expanded 3.7% and 8.1% q-o-q respectively, boosted by the respective currencies’ 3.8% appreciation against the Singapore dollar in 2Q18.
NIM expanded 11bp y-o-y and 2bp q-o-q to 1.85%, benefitting from higher interest rates in Singapore and Hong Kong.

Fees & commissions grew at a slower 11% y-o-y. Contributions from wealth management receded 9.4% q-o-q (but still grew a healthy 22.4% y-o-y) due to increased risk aversion towards the latter half of the quarter. AUM increased 23% y-o-y to S$216b in 2Q18.
Loan- related fees declined 12.5% y-o-y due to a lack of large transactions. Fees for transaction services grew at a slower 3.9% y-o-y as growth in cash management was offset by weakness in trade finance.

Income from customers’ flow increased 7.6% y-o-y to S$312m. Unfortunately, income from treasury markets declined 58.5% y-o-y to S$107m due to a flatter yield curve and wider credit spreads.

NPL balance dropped 1.2% q-o-q while NPL ratio improved 6bp q-o-q to 1.56%. Provisions further declined 36% q-o-q to S$105m. There was a write-back of S$65m for exposure to an oil & gas support services company.
We believe this is related to the sale of heavy lift and construction vessel Lewek Constellation to Saipem for US$275m.

DBS foresees heightened macro uncertainty due to the escalation in US-China trade tension. Management has moderated guidance for loan growth from 8% to 6-7% for 2018 due mostly to the impact on trade loans, which accounted for 13% of total loans as of Jun 18. Management also expects new housing loans to moderate by S$0.5b to S$3.5b due to the cooling measures for residential properties.
NIM is expected to be 1-2bp above management’s previous guidance of 1.85% for 2018, assuming two more rate hikes in 2H18 and a 50% pass through to domestic interest rates in Singapore.
Guidance for total operating income was maintained at low double-digit growth.

DBS Hong Kong achieved 62% y-o-y growth in net profit to S$740m for 1H18. Net interest income grew 21% y-o-y as loans increased 20% y-o-y, driven by large corporations. NIM expanded 18bp y-o-y to 1.92% as DBS Hong Kong benefitted from higher HIBOR and healthy CASA ratio of 56.2%. Fees & commissions grew 13% y-o-y.
DBS recognised net gains of S$86m on the disposal of a property in Hong Kong (one floor of The Center at 99 Queen's Road Central) in 1Q18. Excluding the gains, net profit would have increased 43% y-o-y for 1H18.

DBS plans to complete the conversion of its India branch into a wholly-owned subsidiary by Nov 18. Management intends to invest to scale up distribution in 2019. It plans to open 20 branches plus 100 points-of-presence.
DBS declared an interim dividend of 60 cents/share.

We trim our net profit forecasts by 1% for 2018 and 3% for 2019 as we moderate our loan growth and net trading income assumptions for 2H18 and 2019.

We trim our target price to S$28.20, based on 1.55x 2018F P/B, derived from the Gordon 11.7%, COE: 8.25% (Beta: 1.1x) and Growth: 2.0%).

Jonathan Koh CFA UOB Kay Hian Research | https://research.uobkayhian.com/ 2018-08-03

SGX Stock Analyst Report HOLD Downgrade BUY 28.20 Down 28.950