DBS Group Holdings (DBS SP) - UOB Kay Hian 2018-10-17: 3Q18 Results Preview ~ Double-digit Growth In Net Interest Income

DBS GROUP HOLDINGS LTD (SGX:D05) | SGinvestors.io DBS GROUP HOLDINGS LTD (SGX:D05)

DBS Group Holdings (DBS SP) - 3Q18 Results Preview: Double-digit Growth In Net Interest Income

  • We expect DBS to achieve 16% y-o-y growth in net interest income due to NIM expansion of 13bp y-o-y and a sequential recovery in net trading income due to wider spreads as a result of increased volatility in regional currencies.
  • Higher income helped DBS absorb the pick-up in credit costs. We forecast net profit of S$1,386m, up 3.9% q-o-q and up 72.8% y-o-y (3Q17 was a low base on huge provisions for exposure to the O&G sector).
  • Upgrade to BUY with a new target price at S$29.50.



WHAT’S NEW


Moderation in loan growth in 2H18.

  • We expect loan growth of 1.2% q-o-q and 8.8% y-o-y in 3Q18, in line with the toned-down guidance of 6-7% for the full-year 2018. The expansion for corporate loans and mortgages was offset by shrinkage in trade loans.

Double-digit growth in net interest income.

  • We expect continued but gradual NIM expansion of 1bp q-o-q to 1.86% in 3Q18 due to DBS’ strong deposit franchise for the Singapore dollar.
  • On a y-o-y basis, NIM expanded by a significant 13bp, which could generate strong growth in net interest income of 16% y-o-y to S$2,291m.


~ SGinvestors.io ~ Where SG investors share

Stable fee income.

  • We expect fees to have been marginally down by 1.8% q-o-q but up 1.2% y-o-y at S$693m.
  • High net worth clients turned more risk averse, resulting in weakness in wealth management fees, which was offset by decent growth from credit cards.

Recovery in trading income.

  • We expect a recovery in net trading income of 18.9% q-o-q to S$270m as spreads usually widen due to volatility in regional currencies.

Maintaining cost efficiency.

  • We expect operating expenses to have increased 12.9% y-o-y. We estimate cost-to-income ratio at 43.3% for 3Q18, in line with management’s guidance of 43% for the full-year 2018.

Pick-up in credit costs.

  • We expect specific provisions to be at 25bp, at the higher end of the guided range of 20-25bp, given the deterioration in the macro outlook.
  • Unlike in 2Q18, DBS did not benefit from the write-back for exposures to the O&G sector in 3Q18. We estimate credit costs at 28bp for 3Q18, compared to 12bp for 2Q18. We expect NPL ratio to be stable at 1.55% as NPL formation remains benign.


STOCK IMPACT


Achieving growth despite uncertainties from trade conflicts.

  • We forecast net profit of S$1,386m, up 3.9% q-o-q and up 72.8% y-o-y (huge provisions for exposures to the O&G sector in 3Q17). 
  • Double-digit y-o-y growth in net interest income and a sequential recovery in net trading income have helped DBS cope with the pick-up in credit costs. We reckon that 3Q18 results would be satisfactory despite the uncertainties relating to trade conflicts.

Take advantage of share price weakness.

  • The stock has corrected 8.5% since our downgrade to HOLD on 3 Aug 18.
  • We expect bouts of volatilities in the run-up to the US mid-term elections on 6 Nov 18, which would present opportunities to accumulate the stock.


EARNINGS REVISION/RISK

  • We maintain our existing earnings forecasts.


VALUATION/RECOMMENDATION

  • Upgrade to BUY. Our target price of S$29.50 is based on 1.53x 2019F P/B, derived from the Gordon Growth model (ROE: 12.1%, COE: 8.25% (beta: 1.1x), Growth: 1.0%).


SHARE PRICE CATALYST

  • NIM expansion from higher interest rates in Singapore and Hong Kong.
  • Improvement in cost/income ratio due to digitalisation and strategic cost management initiatives.
  • Growth from overseas markets, such as China, Hong Kong, India, Indonesia and Taiwan, including initiatives in digital banking.





Jonathan Koh CFA UOB Kay Hian Research | https://research.uobkayhian.com/ 2018-10-17
SGX Stock Analyst Report BUY UPGRADE HOLD 29.50 UP 28.200



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