DBS Group - Maybank Kim Eng 2019-02-18: On Track To Deliver In 2019E

DBS GROUP HOLDINGS LTD (SGX:D05)

DBS Group - On Track To Deliver In 2019E

DBS GROUP HOLDINGS LTD (SGX:D05)'s core 2018 earnings were in line with MKE and Street expectations with 4Q18 earnings rising 8.3% y-o-y. Higher NIM (+9bps y-o-y) and loan growth (+6.7% y-o-y) were key drivers that will continue to push earnings momentum in 2019E.
Higher costs surprised us and this pressure is likely to remain from regional expansion and integration efforts. We have lowered FY19/20E core net profit by 4% (Fig2 in the PDF report) and marginally reduced our multi-stage DDM Target Price to SGD29.56 (COE 10.3%, 3% terminal), which still offers 17% upside.
Maintain BUY on our top sector pick.
Deterioration of asset quality remains a key risk.

2018 adjusted NIM increased 11bps y-o-y from higher interest rates driven asset yield re-pricing. This trend should continue in 2019E as the loan book catches up with prevailing rates. Indeed, management expects a 4- 5bps NIM increase even without a rate hike, particularly as board-rate linked mortgages are re-priced. These make up 30% of mortgages, according to management.
Separately, DBS is seeing good demand for non-trade corporate loans, and together with regional pump-priming and domestic demand it should see loan growth again this year (+5.3% y-o-y 2019E MKE).

Management continues to see good asset quality with limited sector-specific pressure. DBS' 4Q18 NPL growth fell 2.2% y-o-y. We have lowered overall credit charges by 8-9% to 24bps and 26bps for 2019E & 2020E, to reflect management guidance.
Exposure to the Singapore power and energy sector, which is suffering from overcapacity, needs to be watched, but DBS has been actively provisioning here for potential risks.

The cost-to-income ratio came in higher at 44% from ANZ integration and lower trading income. Higher costs are set to continue in 2019E as DBS doubles its network in India and spends on integration.
Investments in automation may mitigate some of the pressure, but this needs to be closely watched.

Thilan Wickramasinghe Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2019-02-18

SGX Stock Analyst Report BUY MAINTAIN BUY 29.56 DOWN 30.180