DBS - OCBC Investment 2018-08-03: Growth Momentum To Continue

DBS - OCBC Investment Research 2018-08-03: Growth Momentum To Continue DBS GROUP HOLDINGS LTD SGX:D05

DBS - Growth Momentum To Continue

  • 2Q hurt by lower trading.
  • Growth in Net Interest Income.
  • Revised Fair Value of S$31.83.

Weakest quarter for trading income in a decade

  • DBS reported 2Q18 net earnings of S$1.33b, +18% y-o-y and -12% q-o-q, and below market expectations of S$1.44b. The difference was largely due to the decline in trading income in 2Q18 (a difference of S$141m q-o-q) and the absence of property disposal gain (in 1Q18 there was a S$86m gain from the sale of a HK property).
  • Net Interest Income showed good growth, +18% y-o-y and +5% q-o-q. However, Non-interest Income fell 6% y-o-y and 21% q-o-q. Net Interest Margin (NIM) improved from 1.74% in 2Q17 and 1.83% in 1Q18 to 1.85% in 2Q18. Allowances also fell from S$304m in 2Q17 and S$164m in 1Q18 to S$105m in 2Q18.
  • As expected, DBS declared a first half dividend of 60 cents (versus 33 cents previously). The shares will trade ex-dividend on 8 August 2018.

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Cautiously optimistic

  • Management is cautiously optimistic, sharing that business momentum continues to be healthy. For 1H18, the group saw growth from cards, wealth and SME. Wealth income grew 30%, while Cards improved 29%. Current AUM is S$216b, up 23%. However, Treasury Markets disappointed and income fell sharply in 2Q18 to S$107m versus S$249m in 1Q18.
  • Going forward, the current trade tensions, if escalated, could impact Asian economies. Domestically, the property cooling measures are likely to rein in loans growth in 2019. For 2018, management is guiding for reduced loans growth of 6-7%, down from 8%, large due to trade loans. With expected higher rates ahead, NIM is likely to go up 1-2 bps above its previous guidance of 1.85%.
  • The guidance for income growth is low double-digit. Management guided for cost-to-income of 43%.

Easing Fair Value to S$31.83

  • Apart from lower trading income, there were broad-based improvements in 2Q18. We have revised our estimates taking into account better Net Interest Income and slightly lower Non- interest Income.
  • Overall, our FY18 earnings dropped from S$5874m to S$5812m. With the adjustments, our fair value estimate is trimmed from S$32.67 to S$31.83.
  • At current price of S$26.50, dividend yield is 4.5%.

Carmen Lee OCBC Investment Research | https://www.iocbc.com/ 2018-08-03
SGX Stock Analyst Report BUY Maintain BUY 31.83 Down 32.670