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

DBS Group Holdings - UOB Kay Hian Research 2018-08-03: 2q18 Trade Tension Affects Trade Loans And 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.



RESULTS

  • 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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Net interest income grew by a hefty 17.8% y-o-y.

  • 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.

Sequential decline in fees.

  • 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.

Net trading income declined 23.1% y-o-y to S$227m.

  • 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.

Asset quality was stable.

  • 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.


STOCK IMPACT


Tone down guidance for loan growth.

  • 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.

Stellar performance from Hong Kong.

  • 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.

Increase investments in India.

  • 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.


EARNINGS REVISION/RISK

  • 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.


VALUATION/RECOMMENDATION

  • 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



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