DBS Group - CGS-CIMB Research 2019-04-29: Ample Ammunition


DBS Group - Ample Ammunition

  • FY19-21F EPS raised by 1-6% to reflect better trading income and improved credit costs. We assume credit cost of 20bp in FY19F and 22bp in FY20F.
  • We keep our forecasts of a 5% increase in DBS Group's FY19F loan growth and 5bp rise in NIM; an additional +1bp in NIM could add 0.7% to our FY19F net profit.
  • Maintain ADD, with a higher GGM-based Target Price of S$30.00 (implied P/BV of 1.54x vs. ROE of 13%).
  • NIM, loan growth and wealth management could surprise on the upside.

Treasury income of S$200m a reasonable estimate

  • DBS GROUP HOLDINGS LTD (SGX:D05)'s wealth income rebounded to S$315m in 1Q19 from a 2-year low of S$218m in 4Q18 as client activity picked up on the back of buoyant capital markets. Stripping off equity valuation gains, DBS recorded net new asset under management (AUM) of c.S$1bn for 1Q19.
  • Refer to report: DBS Group - CGS-CIMB Research 2019-04-29: Premium Bank for DBS's 1Q19 earning details. 
  • Barring the S$443m 1Q19 trading income outperformance, we think DBS’s guidance of S$200m/quarter in treasury income is a reasonable estimate given the still-uncertain macro outlook. As such, we review our EPS estimates upwards.

NIM +1bp q-o-q to 1.88%; potential upside to FY19F +5bp NIM

  • The 1bp q-o-q NIM expansion in 1Q19 came primarily from mortgage board rate repricing as the bank shed more expensive S$ fixed deposits. We believe the bulk of the NIM impact from its repricing exercises would come through in 2Q19F as funding pressures moderate amid the US Fed rate hike pause.
  • DBS guides that there could be a 1bp upside above its initial 4-5bp NIM guidance from lagged rate hike effects and ongoing maturities of fixed-rate loans due in 2H19. While we keep our forecast of a 5bp y-o-y rise in FY19F NIM, an additional 1bp increase in NIM could lift our FY19F net profit up 0.7%.

Pipeline corporate loans should support mid single-digit growth

  • DBS’s mortgage book contracted slightly (-0.8% q-o-q) in 1Q19 as refinancing activity and new bookings stayed muted. Full-year net new mortgages could decline to S$1bn-1.5bn from the S$1.5bn-2bn previously guided. Trade loans were also allowed to run off as pricing was unappealing despite having stabilised.
  • Nonetheless, pipeline corporate deals seem supportive of mid single-digit loan growth in FY19F; we think loan growth should pick up from the 0.6% q-o-q expansion in 1Q19 as pipeline projects come to market.

15bp loan SPs in 1Q19 leads us to forecast 20bp FY19F credit cost

  • Credit cost improved to 9bp in 1Q19 due to general provision (GP) write-backs and lower loan specific provisions (SPs). The write-back was largely due to loan repayments and higher collaterals, as well as upgraded risk ratings of several exposures.
  • New corporate non-performing asset (NPA) formation halved to S$109m from the average S$220m per quarter seen in FY18; this resulted in lower loan SPs of 15bp in 1Q19 (vs. average of 19bp in FY18).
  • We revise our credit costs estimates to 20bp (from 23bp previously) as asset quality remains contained.
  • Potential re-rating catalyst is the resolution of US-China trade tensions.

Andrea CHOONG CGS-CIMB Research | LIM Siew Khee CGS-CIMB Research | https://research.itradecimb.com/ 2019-04-29
SGX Stock Analyst Report ADD MAINTAIN ADD 30 UP 29.000