DBS Group - OCBC Investment 2019-02-19: Record Year; Continued Improvement Expected


DBS Group - Record Year; Continued Improvement Expected

  • A record 2018.
  • High-single-digit income growth.
  • Still a BUY.

4Q18 slightly below consensus

  • DBS GROUP HOLDINGS LTD (SGX:D05) posted 4Q18 net earnings of S$1.32b, a shade below Bloomberg consensus of S$1.34b, and down 7% q-o-q. For the full year, it was still a record year, with net earnings of S$5.58b, up 28%.
  • For 4Q18, the softness in global market was clearly seen in the weaker set of earnings. Net Interest Income rose 3% q-o-q and 11% y-o-y to S$2.33b, as Net Interest Margin (NIM) improved from 1.78% in 4Q17 and 1.86% in 3Q18 to 1.87% in 4Q18 (full year improvement from 1.75% to 1.85%). However, Non-interest Income fell 17% q-o-q and 4% y-o-y to S$915m. This was due to lower fee (down 9% q-o-q to S$635m) and trading incomes (down 35% q-o-q to S$229m).
  • Operating expenses rose 1.4% versus the previous quarter and cost-to-income ratio reached 46.3% (full year is 44% versus 43% in FY17).
  • Allowances declined 13% q-o-q and 9% y-o-y to S$205m. Full year allowances fell 63% to S$710m. NPL ratio fell from 1.7% in FY17 to 1.5% in FY18.
  • A final dividend of 60 cents was proposed, bringing full year payout to S$1.20. DBS will trade ex-dividend on 2 May and dividend will be paid on 17 May 2019.

Fairly positive guidance

  • Management is fairly upbeat, following the lackluster 4Q18 when global markets were hurt by broad-based weakness. Since then, sentiment and market activities have recovered.
  • Management is guiding for mid-single-digit loans growth and high-single-digit income growth. In addition, it is guiding for cost-to-income of 43% (versus 44% in FY18).
  • While the market was generally expecting 2-4 hikes in 2019, this expectation has since come off, but management is positive of improvement in ROE during the year. Management is of the view that there is still potential to re-price a large part of its loans progressively and this could help to lift NIM.

Headwinds remain, but continued improvement expected

  • While headwinds remains and this includes the spillover effect from a slowdown in China, on-going trade tensions and disruptions, there are still some silver linings and growth areas in Asia, including healthy domestic growth and demand and the possibility of fiscal stimulus.
  • On the mortgage front, management is expecting loans growth of S$1.5- $2b. It will also continue with its digibank strategy.
  • We have lowered our FY19 estimates to reflect the more cautious operating environment, and also lowering our fair value estimate from S$30.83 to S$29.31.
  • Dividend yield is estimated at 4.8% based on DBS share price on 15 Feb 2019.

Carmen Lee OCBC Investment Research | https://www.iocbc.com/ 2019-02-19
SGX Stock Analyst Report BUY MAINTAIN BUY 29.31 DOWN 30.830