DBS - RHB Invest 2019-02-18: More NIM Widening As Loans Reprice

DBS GROUP HOLDINGS LTD (SGX:D05)

DBS - More NIM Widening As Loans Reprice

Maintain BUY with lower SGD28.80 Target Price from SGD29.80, pegged to 1.5x 2019F BV, 16% upside plus 4.8% FY19F yield.
Our Target Price is based on our long-term ROE assumption of 13.5%, which is higher than 2018’s 12.2% given expected future NIM expansion and cost efficiencies with digitisation.

DBS GROUP HOLDINGS LTD (SGX:D05) 2018 net profit of SGD5.58bn was up 28% y-o-y – close to our forecast of SGD5.68bn and consensus’ SGD5.72bn.
4Q18 NIM of 1.87% was 1bps wider q-o-q, while loans expanded a marginal 1% q-o-q. If we strip off the impact of earnings growth from the 54% fall in allowances, profit before allowances was still up 9%.

Driving the y-o-y earnings growth was an 11% rise in NII, partly offset by an 11% rise in expenses and 13% decline for “other non-II”. Excluding one-time items, 4Q18 core net profit was up 8% y-o-y.

DBS’ 4Q18 NIM widened by 1bp q-o-q to 1.87%, driven by higher Singapore interest rates. Assuming no further Federal Funds Rate (FFR) hikes in 2019, management guided (during analyst briefing) for a 4-5bps NIM expansion in 2019, which will come from the repricing of loans. If FFR were to be hiked, the NIM expansion in 2019 could be even stronger.
We are forecasting 2019 NIM of 1.9%, up from 2018’s 1.85%.

DBS’ 2018 gross loans grew by 6.7%, with building & construction loans up SGD12bn (or 19%) and loans to financial institutions, investment & holding companies up SGD7.8bn (or 45%). Management guided for 2019 loans to expand in the mid-single-digit levels, with likely strength from business loans.
Mortgage expansion is expected to be muted following the Jul 2018 property cooling measures – DBS said mortgage bookings are 30-40% lower vs pre-measures. We are forecasting 2019 loan growth of 5%.

DBS’ 4Q18 CIR was at 46.3%, up 1.9ppts y-o-y. This was partly the consequence of lower treasury markets income. Management guided for 2019 CIR of 43%, vs 2018’s 44%.
We believe the digitisation initiatives will contribute to lower CIR not only in 2019 but also beyond.

This gives DBS’ FY18 full-year dividend of SGD1.20/share. The scrip dividend scheme will not be applied.
Our long-term ROE assumption is 13.5%, lowered from 13.8%. Management guided for 2019 ROE of 12.5%, on the assumption that there will be no further FFR hikes. This reflects management’s bullish expectations as 2018’s 12.1% ROE was already the highest in more than a decade.

This is derived from CoE assumption of 10.1%. We believe the ascribed P/BV premium over the 5-year historical P/BV of 1.2x is justified, given rising NIM and cost efficiencies from digitisation.
Downside risks to our forecasts include higher impairment charges and han-expected NIM.

Leng Seng Choon CFA RHB Securities Research | https://www.rhbinvest.com.sg/ 2019-02-18

SGX Stock Analyst Report BUY MAINTAIN BUY 28.80 DOWN 29.800