DBS Group - CGS-CIMB Research 2019-05-21: Caught In The Crossfire


DBS Group - Caught In The Crossfire

  • Upside to DBS GROUP HOLDINGS LTD (SGX:D05)'s mid-single-digit loan growth target may be capped by weaker sentiment for cross-border trades and corporates’ wait-and-see approach.
  • While still benign, asset quality may be a point of concern if trade tensions escalate. We lower loan FY19 growth expectations to 4% (from 5.4%).
  • Downgrade to HOLD. Valuations are expensive at 1.3x CY19F P/BV; we see 1.2x P/BV or below as an attractive entry point.

Weak sentiment likely to weigh on market-driven income

  • The STI ended the year 5% lower after the initial 10% tariffs were implemented in Sep 2018. We opine that the tariff hike to 25% in May 2019 and China’s retaliatory measures could result in a similar wave of capital market choppiness in the coming months, and correspondingly, a significant swing in DBS GROUP HOLDINGS LTD (SGX:D05)’s market-related income.
  • To note, wealth and trading income accounted for close to 18% of DBS’s total income in FY18.

We revise FY19 loan growth expectations to 4%

  • Slower regional growth and weak domestic mortgage activity have already been considered in DBS’s mid-single-digit FY19 loan growth guidance. However, we think that there is downside risk to this figure, and revise our loan growth assumptions to 4% from 5.4% previously.
  • Collectively, DBS’s Hong Kong and China loans had contracted 4% in 2H18. While a portion of the contraction was a deliberate move by the bank to deemphasise trade loan growth due to unattractive pricing, risk-off sentiment could weigh more heavily on trade activity this time round as the tariff quantum heightens.

Asset quality steady for now; full-blown trade war may overturn this

  • DBS’s asset quality has held steady since the clean-up of its oil-and-gas portfolio at end- 2017. Credit costs improved to 9bp in 1Q19 mainly on stronger-than-expected general provision (GP) write-backs.
  • In contrast to peers, the bank saw an improvement in the credit quality of its portfolio, thus allowing for the GP write-backs. With that, DBS took on a more positive tone to credit costs for FY19, guiding for SPs to be below cycle average; we expect 20bp in FY19.
  • Net new NPA formation trended lower at S$150m in 1Q19 (FY18 avg.: S$274m per quarter), but we are cognisant that that this may creep up in the medium term on dampened business sentiment.

Downgrade DBS to HOLD; Target Price lowered to S$27.64

  • We think that lower cross border transactions and reduced regional growth could weigh on DBS’s ROEs in the coming quarters.
  • Continued NIM expansion from its mortgage repricing exercise is still likely to come through in coming quarters, but its effects on earnings could be moderated by a potential rise in provisions. That said, the bank’s 14.1% CET-1 ratio provides a strong loan loss absorption buffer and scope to maintain S$1.20/share payout in dividends. See DBS's dividend history.
  • Downside risk is a Fed rate cut.
  • See attached PDF report for sector comparison.
  • See also sector report: DBS OCBC UOB Banks - Trump Card

Andrea CHOONG CGS-CIMB Research | LIM Siew Khee CGS-CIMB Research | https://research.itradecimb.com/ 2019-05-21
SGX Stock Analyst Report HOLD DOWNGRADE ADD 27.64 DOWN 30.000