DBS - RHB Invest 2018-11-05: Future Earnings Still On Growth Momentum


DBS - Future Earnings Still On Growth Momentum

  • Maintain BUY, new Target Price of SGD29.80 from SGD30.30, 21% upside and 5% FY19F yield.
  • At DBS’ results teleconference, management reiterated its bullish stance for 2019 – guiding for further NIM widening from FFR hikes, stable loan growth of mid-single digits and wealth management growth potential.
  • We derive our Target Price on assuming long-term ROE of 13.8%, which could be achievable based on management’s guidance of ~13 2019F ROE.
  • Widening NIM is the catalyst to drive DBS’ share price higher.
  • UOB remains our Top Pick for Singapore bank stocks.

DBS’ 3Q18 net profit of SGD1.41bn

  • DBS’ 3Q18 net profit of SGD1.41bn was up 6% q-o-q and 76% y-o-y. Excluding the 3Q17 one-time ANZ integration costs, core net profit would have risen 72% y-o-y.

Expect NIM to widen over the next few quarters.

  • 3Q18 NIM of 1.86% was 1bp wider q-o-q. At the teleconference, management said exit NIM was 1.86%, and guided for 4Q18 NIM of 1.86-1.87%, with more widening in 2019 from lagged effects of SIBOR increases (45% of Singapore loans are booked off SIBOR).
  • We forecast 2018-2019 NIM of 1.86% and 1.92%, premised on the trend of a rising US federal funds rate (FFR).

Slower loan growth guidance due to trade loans.

  • DBS’ 3Q18 loans were 1% higher q-o-q, with trade loans being a drag as yields are unattractive. It had earlier guided for SGD4bn mortgage loan growth this year, but it now appears a SGD2.5bn growth is more likely – the group has a 31% share of the Singapore housing loan market.
  • Management is guiding for mid-single digit 2019 loans growth, as trade loans are seen to remain weak. We forecast overall 2019 loan growth of 6%.

Wealth management strength offsets investment banking weakness.

  • 9M18 wealth management fees rose 25% y-o-y (to SGD923m), whilst investment banking recorded a 34% y-o-y decline (to SGD99m).
  • DBS is optimistic on future wealth management growth, following the addition of 600 staff in wealth management – an area where productivity should rise over the next 2-3 years.

Our long-term ROE assumption is 13.8%.

  • This is on track, as evident from management’s guidance of 13% by 2019 (from 9M18’s 12.4%).
  • Our CoE assumption is 10%, yielding a target P/BV of 1.54x, which is applied to our 2019F BV to derive our SGD29.80 Target Price. We believe the premium over its 5-year historical average P/BV of 1.2x is justified, given the rising NIM trend.
  • During the previous FFR upcycle between mid-2003 and mid-2007, the FFR rose to > 5% from 1%. For that duration, DBS’ P/BV correspondingly rose as high as 1.9x from 1x. The bank now trades only at 1.28x 2019F book, and our target P/BV is set at 1.54x.

Maintain BUY, with a lower SGD29.80 Target Price.

  • Downside risks to our forecasts include higher impairment charges and weaker NIM.

Leng Seng Choon CFA RHB Securities Research | https://www.rhbinvest.com.sg/ 2018-11-05
SGX Stock Analyst Report BUY MAINTAIN BUY 29.80 DOWN 30.300