DBS Group - OCBC Investment 2018-11-05: Value Despite Market Volatility

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DBS GROUP HOLDINGS LTD (SGX:D05)

DBS Group - Value Despite Market Volatility

• Higher 3Q allowances.
• Guiding for 13% ROE.
• Yield is 5%.

3Q just a shade below consensus

• DBS posted 3Q18 net earnings of S$1.41b, slightly below Bloomberg consensus of S$1.44b, but this is still a strong set of results, up 76% y-o-y and +6% q-o-q. This brought 9-month net earnings to S$4.26b, up 34%.
• Net Interest Income rose 15% y-o-y and 2% q-o-q to S$2.27b. Net Interest Margin (NIM) improved from 1.73% in 3Q17 and 1.85% in 2Q18 to 1.86% in 3Q18.
• Non-interest Income rose 2% y-o-y and 13% q-o-q to S$1.10b. On Fee and Commission Income, the decline in investment banking was made up from the rise in loan-related income.
• Allowances declined y-o-y from S$815m in 3Q17, but were up from 2Q18’s S$105m to S$236m in 3Q18. NPL ratio was stable at 1.6%.

Deterioration in market sentiment

• We view the above 3Q results as a good set of earnings despite the deterioration in market conditions and sentiment since May 2018 and the challenging mortgage market in Singapore, especially after the cooling measures in Jul 2018.
• With lingering concerns over the impact of a trade war and the potential impact on regional economic growth, we expect the operating environment to remain challenging in 2019.
• Management is guiding for ROE of 13% and single-digit loan growth in 2019. With more US rate hikes expected for 2019, this is likely to pass through to Singapore rates. On the flipside, management does not see any major deterioration in its portfolio even as rates go higher.
• We are expecting cost-income ratio to stay at around 43%.

Fair value of S$30.83

• With the recent decline in market sentiment and the resultant drop in market valuation, there are limited near term share price drivers.
• As valuations for regional peers have come off sharply recently, we are dropping our valuation from 1.6x book to 1.5x book, resulting in a decline in our fair value estimate to S$30.83.
• At current price of S$24.00, yield is 5.0%.

Carmen Lee OCBC Investment Research | https://www.iocbc.com/ 2018-11-05

SGX Stock Analyst Report BUY MAINTAIN BUY 30.83 DOWN 31.830