DBS - RHB Invest 2018-08-02: Management Raises 2018 Net Interest Margin Guidance

DBS - RHB Securities Research 2018-08-02: Management Raises 2018 Nim Guidance DBS GROUP HOLDINGS LTD SGX:D05

DBS - Management Raises 2018 Net Interest Margin Guidance

  • Maintain BUY and SGD30.30 target price, 13% upside. 
  • 1H18 earnings represented 50% of our full-year forecast, while 2Q18 NIM widened 2bps q-o-q to 1.85% on higher Singapore and Hong Kong interest rates. However, both net trading income and wealth management fees contracted q-o-q. 
  • We raise our 2018 NIM forecast to 1.87% from 1.85%, in line with management’s guidance at the recent results briefing. 
  • We derive our Target Price on our assumption of long-term ROE of 13.6%. Widening NIM is the catalyst to drive DBS’ share price higher.

DBS’ 2Q18 net profit stood at SGD1.33bn,

  • DBS’ 2Q18 net profit stood at SGD1.33bn down 12% q-o-q (+18% y-o-y). Excluding one-time items, core net profit should have been slightly higher at SGD1.37bn.

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We expect NIMs to widen over the next 2-3 years.

  • 2Q18 NIM of 1.85% was 2bps wider q-o-q – it was 11bps wider y-o-y. Exiting June, NIM stood at 1.88%. 
  • Management has now guided for 2018 NIM of 1.86-1.87%, wider than the pre-results guidance of 1.85%. We are forecasting 2018-2019 NIMs of 1.87% and 1.95%, premised on a rising federal funds rate (FFR) in the US.

Slower loan growth guidance due to trade loans.

  • DBS’ 2Q18 loans were 3% higher q-o-q, driven mainly by building and construction loans, which rose by 6% q-o-q. In constant currency terms, loans expanded by 1% q-o-q, as consumer and non-trade corporate borrowings grew 2%. 
  • Looking ahead, management guided for 2018 loans of 6-7% vs the pre-results guidance of 8%. We forecast a 2018 loan expansion of 6.5%.

Weakness in net trading income.

  • DBS’ 2Q18 net trading income of SGD227m was down 38% q-o-q (-23% y-o-y). Treasury markets’ income of SGD107m (-57% q-o-q) was impacted by widening Asian credit spreads and a flattening yield curve. Despite some structural impact from exchange trading and high frequency, management expects some pickup in 2H18.
  • 1H18 dividend of SGD0.60/share was declared vs SGD0.33 a year ago. We are forecasting an FY18 full-year dividend of SGD1.20/share.

Our long-term ROE assumption is maintained at 13.6%

  • Our long-term ROE assumption is maintained at 13.6%, consistent with management guiding for 13-14% (14% is achievable if costs are well controlled). Factoring in our cost of equity (CoE) assumption of 10.2%, we obtain a target P/BV of 1.46x, which leads to our Target Price of SGD30.30.
  • During the previous FFR upcycle between mid-2003 and mid-2007, the FFR rose to > 5% from 1%. For that duration, DBS’ P/BV correspondingly rose as high as 1.9x from 1.04x. Currently, the bank only trades at 1.3x 2019F book, and our target P/BV is set at 1.46x.
  • We maintain our BUY recommendation and SGD30.30 Target Price, 13% upside. 
  • Downside risks to our forecasts include higher impairment charges and weaker NIMs.

Leng Seng Choon CFA RHB Securities Research | https://www.rhbinvest.com.sg/ 2018-08-02
SGX Stock Analyst Report BUY Maintain BUY 30.300 Same 30.300