DBS Group - CGS-CIMB Research 2018-11-05: 3Q18 Waiting On Further NIM Pass-Through


DBS Group - 3Q18: Waiting On Further NIM Pass-Through

  • We expect NIM to increase further as pass-through of loan repricing takes effect. We think FY18F margins will come in within the guided 1.86- 1.87%.
  • We lower FY18F loan growth to 6.3% due to lacklustre +0.7% q-o-q in 3Q18 and lower trade loans. Credit costs expected to normalise towards 21 bps.
  • We cut our FY18- 20F EPS by c.2.2- 3.8% as we factor in the 3Q18 results. Maintain HOLD with a lower GGM Target Price of S$27 (ROE 13.0).

Funding ahead of rising deposit costs

  • In terms of funding, DBS had let some of its US$, HK$, and Rmb run off as it deemphasised the growth of trade loans in 3Q18 given its unattractive pricing. The bank guides to still maintain the build-up of its funding base over the past quarter (mainly US$ and HK$), which we suspect will be for sustained non-trade loan volumes.
  • With asset yields poised to increase amid the lagged pass-through of loan repricing and still-rising deposit costs, we think that NIMs are likely to come in within management’s guidance of 1.86-1.87% in FY18F.

Lacklustre loan growth

  • Loan growth was more moderate at 0.7% q-o-q in 3Q18 (2Q18: 3.0%). Key regional drivers were rest of the world (+5% q-o-q), South and Southeast Asia (+4% q-o-q), and Hong Kong (+2% q-o-q); the Rest of Greater China’s loan book contracted 7% q-o-q as the bank deemphasised the growth of trade loans.
  • We now tone down our expectations of loan growth to 6.3% from 6.9% previously. YTD 9M18 loan growth was 5.3%.

Watchful on asset quality of Indonesian loan book

  • Asset quality remained healthy although total NPA edged up to S$5.90bn 3Q18 (2Q18: S$5.87bn) on weaker recoveries. NPA coverage edged up to 93% of loans (2Q18: 92%) while NPL ratio held steady at 1.6%. Total allowances rose to S$236m (2Q18: S$105m) as SPs normalised to 21bp of loans (2Q18: 12bp) given the absence of large writebacks.
  • Further impairment of S$46m (or 5bps) were set aside mainly due to a lumpy exposure backed by a performance guarantee.
  • There was some NPL pickup from the South and Southeast Asia portfolio (+11% q-o-q/-13% y-o-y), where the bank highlighted an Indonesian corporate from the general commerce industry being caught up in a global restructuring exercise.
  • Risks from Greater China are relatively contained with the bank identifying less than 20 names that need watching.
  • We forecast credit costs to normalise towards 21 bps in FY18 vs the bank’s through-the-cycle average of c.26-29 bps or c.S$800m per annum.

Valuation still above mean at 1.3x FY18F P/BV; Maintain HOLD

  • Our core EPS is slashed by 2.2-3.8% and DPS cut by 0-7% for FY18-20F as we factor in 3Q18 results.
  • We maintain a HOLD with a lower GGM Target Price of S$27 (ROE of 13%).
  • An attractive entry point would be about 1.2x P/BV or below S$23.
  • Upside risk is stronger loan growth while downside risk is weaker sentiment due to trade tensions and asset quality pressures from regional markets.

Lim Siew Khee CGS-CIMB Research | https://research.itradecimb.com/ 2018-11-05
SGX Stock Analyst Report HOLD MAINTAIN HOLD 27.00 DOWN 28.000