DBS Group - UOB Kay Hian 2019-04-22: 1Q19 Results Preview ~ NIM Expanded; Asset Quality Stable

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

DBS Group - 1Q19 Results Preview: NIM Expanded; Asset Quality Stable

  • We forecast net profit of S$1,482m for 1Q19, up 12% q-o-q but down 2% y-o-y. Net interest income grew 12.7% y-o-y, driven by NIM expansion of 2bp q-o-q generated by higher mortgage rates.
  • DBS benefitted from a sequential rebound in market-sensitive sources of income, such as wealth management and net trading income. Concerns over escalation in trade conflict have abated as the probability of a trade deal between the US and China has improved.
  • Maintain BUY. Target price: S$30.30.



WHAT’S NEW


Loan growth in line with guidance of mid-single-digit expansion for 2019.

  • We expect moderate loan growth of 1.0% q-o-q and 6.1% y-o-y in 1Q19, driven by non-trade corporate loans.
  • We expect residential mortgages to be sluggish due to lacklustre new sales and on-going repayment of existing housing loans.

NIM expansion driven by higher mortgage rates.

  • DBS GROUP HOLDINGS LTD (SGX:D05) has raised its Fixed Home Rate (FHR) by 15bp in Jan 19 and 40bp in Apr 19. Its two-year fixed rate housing loans usually get re-priced higher after the initial two years of fixed interest rates.
  • We estimate 43% of DBS’ Singapore dollar loan book of S$142b is of residential mortgages. We estimate 39% of its Singapore dollar loan book is of corporate loans pegged to SIBOR and SOR, which get re-priced every 3-6 months.
  • We expect NIM expansion of 2bp q-o-q to 1.89% in 1Q19.

Fees normalising after fear factor struck in 4Q18.

  • We expect wealth management fees to rebound 26% q-o-q but recede 17% y-o-y (high base in 1Q18). Contribution from brokerage DBS Vickers could have been affected by uncertainties created by the move to merge retail equity trading into the bank. Weakness in wealth management and brokerage were offset by healthy y-o-y growth for cash management and cards. Overall, we expect fees to have rebounded 10% q-o-q but receded 6% y-o-y to S$697m.
  • We expect seasonally stronger net trading income of S$300m in 1Q19, representing a healthy 31% q-o-q rebound from a seasonally softer S$229m in 4Q18.

Maintaining cost efficiency.

  • We expect operating expenses to have increased 7.2% y-o-y. We estimate cost-to-income ratio (CIR) at 43.5% for 1Q19, in line with management’s guidance of 43% for the full year of 2019.

Asset quality stable.

  • We expect NPL formation to have moderated q-o-q as the outlook has improved with the US and China working towards resolving their trade conflict and hammering out a trade agreement.
  • We expect NPL ratio to have remained stable at 1.51%. We expect specific provisions at 20bp, which is at the lower end of management guidance of 20-25bp.
  • We expect total credit costs at 23bp for 1Q19.


STOCK IMPACT


Higher mortgage rates a boon for DBS.

  • We forecast net profit of S$1,482m for 1Q19, up 12% q-o-q but down 2% y-o-y.
  • DBS benefitted from NIM expansion of 2bp 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. The slight y-o-y decline was caused by a high base in 1Q18.

Impact from restructuring at Ezion and Swiber not significant.

  • Malaysia-based Yinson intends to acquire benefits and rights of US$916m of existing loans extended to EZION HOLDINGS LIMITED (SGX:5ME). Concurrently, Ezion has entered into a debt conversion agreement with Yinson for the issue of up to 22,573m Ezion shares at an issue price of S$0.055. Ezion will also issue 3,360m share options with exercise price at S$0.0605 to Yinson.
  • New York-listed Seaspan will initially invest US$10m in exchange for a 80% stake in New Swiber, which will hold certain assets of the existing SWIBER HOLDINGS LIMITED (SGX:BGK). Upon Swiber securing the development stage LNG-to-power project in Vietnam and other major milestones, Seaspan will invest another US$190m to subscribe for preference shares in Swiber’s wholly-owned subsidiary Equatoriale Energy. If the restructuring is successful, secured creditors of Swiber will be issued 5-year zero coupon redeemable convertible bonds of US$120m in New Swiber.
  • DBS has marked down the valuations of collaterals for exposures to the Oil & Gas (O&G) sector by 75%. Existing provisions are adequate and additional provisions are unlikely to be required. Both restructurings are subject to approvals from creditors, shareholders and regulators.

More accolades.

  • DBS was named Global Bank of the Year by The Banker, based on its ability to deliver returns, gain strategic advantages and serve its markets. DBS was described as a world leader in digital transformation and has successfully changed its culture to counter the threat from big tech companies. This is DBS’ second global best bank award.
  • DBS was recognised as Global Finance’s Best Bank in the World in Aug 18, the first Asian bank to attain this award.
  • Earlier in the year, Euromoney also named DBS the World’s Best Digital Bank and the World’s Best Bank for SMEs.

Evolving into yield play.

  • DBS provides an attractive dividend yield of 4.4% based on a DPS of S$1.20 for 2019F.


EARNINGS REVISION/RISK

  • We raised our net profit forecast for 2019 by 3.1% and by 1.5% for 2020 due to lower credit costs (2019: old 28bp, new 24bp, 2020: old 28bp, new 25bp).
  • Our concerns over escalations in trade conflict have been addressed, as the probability of a trade deal between the US and China has improved.


VALUATION/RECOMMENDATION


Maintain BUY.

  • Our target price of S$30.30 is based on 1.57x 2019F P/B, which is derived from the Gordon Growth Model (ROE: 12.5% (previous: 12.2%), COE: 8.5% (Beta: 1.15x) and Growth: 1.5% (previous: 1.0%)).


SHARE PRICE CATALYST

  • NIM expansion from higher interest rates in Singapore.
  • Improvement in cost/income ratio due to digitalisation and strategic cost management iatives.





Jonathan KOH CFA UOB Kay Hian Research | https://research.uobkayhian.com/ 2019-04-22
SGX Stock Analyst Report BUY MAINTAIN BUY 30.30 UP 28.400



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