DBS Group Holdings - UOB Kay Hian 2019-04-30: 1Q19 Another Record Quarter; Asset Quality Benign

DBS GROUP HOLDINGS LTD (SGX:D05) | SGinvestors.io DBS GROUP HOLDINGS LTD (SGX:D05)

DBS Group Holdings - 1Q19: Another Record Quarter; Asset Quality Benign

  • DBS benefitted from NIM expansion of 1bp q-o-q generated by higher mortgage rates and a sequential rebound in market-sensitive sources of income, such as wealth management fees and net trading income.
  • NPL formation has moderated as the trade conflict between the US and China thaws. CET-1 CAR improved by 0.2ppt q-o-q to a robust 14.1%.
  • Maintain BUY with a new target price of S$30.50.



DBS' 1Q19 RESULTS


Mid-single-digit loan growth driven by non-trade corporate loans.

  • Loans expanded 5.7% y-o-y and 0.6% q-o-q. Non-trade corporate loans grew 11% y-o-y, driven by broad-based activities across the region. Trade loans contracted 11% y-o-y due to unattractive pricing. Consumer loans grew 3% y-o-y.
  • Net interest income grew 8.6% y-o-y.

Underlying NIM was 5bp higher qoq.

  • NIM expanded 5bp y-o-y and 1bp q-o-q to 1.88%. Management explained that underlying NIM would have expanded 5bp q-o-q (instead of 1bp q-o-q), if we exclude the impact from treasury market activities.
  • Gains from gapping positions involving different currencies, accounting wise, was recognised as net trading income, which dragged NIM lower by 4bp q-o-q.

Fees held back by market-sensitive sources.

  • Fees from wealth management rebounded 44% q-o-q due to a recovery in market sentiment, but were 5% lower y-o-y (high base due to exceptional buoyant market sentiment in 1Q18).
  • Card fees increased 21% y-o-y due to higher customer transactions across the region. Transaction service fees increased 6% y-o-y due to growth in cash management and trade finance. Overall, fees rebounded 15% q-o-q but receded 2% y-o-y.

Rebound in non-interest income.

  • Net trading income grew 20% y-o-y to S$443m boosted by gains from interest rate and credit activities.
  • Gains from investment securities also doubled y-o-y to S$53m.

Asset quality remained benign.

  • NPL formation has moderated. NPL ratio improved marginally by 1bp to 1.49%. Total provisions declined 54% y-o-y to S$76m (credit cost: 9bp). There was a write-back in general provisions of S$100m due to improved portfolio credit quality (some accounts were upgraded after credit review) and better external credit conditions (fear over rate hikes did not materialise while concerns over the US-China trade conflict have eased).


STOCK IMPACT


Continued growth in 2019.

  • Management maintained guidance of mid-single-digit loan growth. The bank sees a strong pipeline for non-trade corporate loans but foresees slower growth for residential mortgages. Management guided for high-single-digit growth in total income. Cost-to-income ratio is expected to improve to 43% (2018: 44%).
  • Specific provisions could come in at the lower end of the through-cycle average (20-25bp).
  • Management expects ROE to improve towards 13% in 2019.

Maintain guidance for NIM expansion.

  • Management expects NIM to expand 5bp to 1.95% in 2019 (average for full year), compared to 1.85% last year, even if there are no interest rate hikes.
  • DBS raised its fixed home rate (FHR) by 15bp in Jan 19 and by 40bp in Apr 19, which provide upside for NIM in 1H19. About 60% of S$-denominated loans get re-priced in the first year after an interest rate increase. The balance 40% gets re-priced in the second and third year. Thus, DBS would benefit from NIM expansion in 2H19 and 2020 due to:
    1. the lagged positive impact from rise of SIBOR and SOR in 2018; and
    2. loans on fixed interest rates get re-priced post re-financing.

No change to dividend policy.

  • For 1Q19, the board had declared a dividend of 30 S cents/share. For 2019, dividends will be paid four times a year, instead of two times a year. The change provides shareholders with a more regular dividend income while smoothing out the fluctuation in CET-1 CAR.
  • DBS' policy of paying sustainable dividends that rise progressively with earnings remains unchanged. We expect DBS to provide a total dividend of S$1.20/share (30 S cents/quarter), representing a payout ratio of 51.7%.


EARNINGS REVISION/RISK

  • We adjust our 2019F net profit forecast marginally higher by 0.6% as we factor in the better-than-anticipated performance for 1Q19.


VALUATION/RECOMMENDATION

  • Our new target price of S$30.50 is based on 1.59x 2019F P/B, derived from the Gordon Growth model (ROE: 12.6%, COE: 8.5% (beta: 1.15x), Growth: 1.5%).





Jonathan KOH CFA UOB Kay Hian Research | https://research.uobkayhian.com/ 2019-04-30
SGX Stock Analyst Report BUY MAINTAIN BUY 30.500 UP 30.300



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