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

DBS GROUP HOLDINGS LTD (SGX:D05)

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.

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.

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%.

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.

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

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