DBS Group Holdings - UOB Kay Hian 2018-11-07: 3Q18 Sustained NIM Expansion From Developed Markets

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DBS GROUP HOLDINGS LTD (SGX:D05)

DBS Group Holdings - 3Q18: Sustained NIM Expansion From Developed Markets

• DBS’ NIM expanded 13bp y-o-y and 1bp q-o-q to 1.86%, benefitting from rising interest rates in Singapore and Hong Kong. Net interest income grew by a strong 15.1% y-o-y.
• Net trading income grew 33.6% y-o-y to S$354m due to wider spreads as a result of greater volatility for foreign exchange rates of regional currencies.
• DBS is the prime beneficiary if US and China conclude a trade deal as Greater China (Mainland China, Hong Kong and Taiwan) accounted for 26.6% of total assets.
• Maintain BUY. Target price: S$29.50.

3Q18 RESULTS

• DBS Group Holdings (DBS) reported net profit of S$1,413m, up 76.2% y-o-y (large provisions for Oil & Gas exposures last year) and 5.1% q-o-q. The results were marginally above our expectation of S$1,386m.

Slower loan growth well expected.

• Loan growth moderated to 8.2% y-o-y (2Q18: +11.5% y-o-y) and 0.7% q-o-q (2Q18: +2.9% q-o-q). Non-trade corporate loans expanded S$6b or 2% q-o-q but trade loans shrunk S$3b or 6% q-o-q.
• From a y-o-y perspective, Hong Kong and South & Southeast Asia (India and Indonesia) grew at double-digit rate of 11.4% and 12% respectively.
• NIM widened 13bp y-o-y and 1bp q-o-q to 1.86%, benefitting from NIM expansion in Singapore and Hong Kong. Net interest income increased by a strong 15.1% y-o-y.

Muted increase in fees.

• Net fees and commissions grew just 1.5% y-o-y. Contributions from wealth management and credit cards expanded 7% and 33% y-o-y respectively. Fees from investment banking dropped 66% y-o-y due to the dearth of IPOs in the local stock market.
• Net trading income grew 33.6% y-o-y to S$354m due to wider spreads as a result of greater volatility for foreign exchange rates of regional currencies.

Operating expenses increased by 15.9% yoy.

• ANZ’s wealth management and retail banking businesses accounted for 6ppt of the increase. Excluding ANZ, the increase in operating expenses would be lower at 9% y-o-y. Management explained that there were three one-off expenses totalling S$45m in 3Q18 due to:
  1. 50th anniversary staff bonus,
  2. advertising campaign for re-branding, and
  3. litigation case in Hong Kong.

Credit costs normalise higher.

• Asset quality was stable with NPL ratio unchanged at 1.56%. Total provisions more than doubled q-o-q to S$236m or 27bp as 2Q18 benefitted from a write-back for exposure to an oil & gas support services company.

Stellar performance from Hong Kong.

• DBS Hong Kong's NIM expanded by 24bp y-o-y to 1.97% for 9M18 due to a rising HIBOR. Loans expanded 16% y-o-y while fees grew 10% y-o-y. Net profit in constant currency terms expanded 43% y-o-y.

STOCK IMPACT

Continued growth in 2019.

• Management guided for mid-single digit loan growth and continued NIM expansion in 2019. Non-trade corporate loans are expected to slow from expansion of 10-11% in 2018 to 6-7% in 2019. Fees are expected to increase by a high single-digit.
• Management guided for credit costs of 25-27bp for 2019. However, management sees sustainable path towards an ROE of 13% over the longer term.

Cooling measures affected residential mortgages.

• Management previously expected its portfolio of residential mortgages to expand by S$4b in 2018. The forecast has since been cut to S$2.5b. New bookings for mortgages have dropped by 50% since cooling measures were introduced. The progressive drawdown of mortgages has also slowed.
• Management expects mortgages to expand by only 4-5% in 2018.

Early signs of strain for SME loans.

• Management expects delinquencies for SME loans and unsecured consumer loans to increase, affected by higher interest rates. There are signs of strain for SME loans but its portfolio is well collateralised.
• Management expects a moderate deterioration in asset quality for SME loans. Its portfolio for unsecured consumer loans is small as MAS imposes stringent limits on leverage.

Maintain CIR at 43%.

• Management plans to step up investment in India after incorporating its local subsidiary. Expenses will be incurred to set up more branches and kiosks in India. Thus, cost-to-income ratio (CIR) is likely to stay flat at 43% in 2019 (previous guidance: improvement of 0.5ppt).

EARNINGS REVISION/RISK

• We trimmed our net profit forecast for 2019 by 3% as we factor in higher credit costs of 28.2bp (previous: 25.2bp).

VALUATION/RECOMMENDATION

• Our target price of S$29.50 is based on 1.56x 2019F P/B, derived from the Gordon Growth model (ROE: 12.3%, COE: 8.25% (beta: 1.1x), Growth: 1.0%).

Jonathan Koh CFA UOB Kay Hian Research | https://research.uobkayhian.com/ 2018-11-07

SGX Stock Analyst Report BUY MAINTAIN BUY 29.500 SAME 29.500