DBS Group - CGS-CIMB Research 2019-07-29: Bracing For Rate Cuts Ahead


DBS Group - Bracing For Rate Cuts Ahead

  • Management cautions for a 1-3bp NIM contraction in 2H19 on potential Fed rate cuts. We cut our FY19-21F estimates by 1-3bp to reflect falling rates.
  • Delayed corporate drawdowns in 2H19 should sustain 4% loan growth target despite flattish mortgage growth. Credit costs still intact despite higher GPs.
  • Maintain HOLD with a lower GGM-based Target Price of S$27.59 as we cut FY19-21F EPS by 1-3% to reflect lower NIMs and adjust full-year treasury income.

We cut FY19-21F NIMs by 1-3bp to factor in potential Fed rate cuts.

  • The +3bp q-o-q NIM expansion in 2Q19 was aided by higher S$ and HK$ rates amid a release of expensive fixed deposits (-1.7% q-o-q). Tailwind repricing effects from the bank’s board-rate mortgages had also contributed to the increase.
  • Management’s base case scenario is for 2 Fed rate cuts by end-2019, in which case DBS (SGX:D05)’s NIMs could contract up to 3bp in 2H19. We bake in these assumptions given tipping LIBOR, SOR and HIBOR rates since 2Q19, as well as elevated probabilities of 2 Fed fund futures cuts in FY19.
  • While residual repricing effects of the bank’s fixed rate housing loans (25% of mortgages) could buffer some of the rate cut impact, pricing pressure from lower rates may weigh on asset yields nonetheless. We cut FY19-21F NIMs by 1-3bp to reflect this.

FY19 net new mortgages expected to be flattish (from S$1bn-1.5bn).

  • In contrast to previous assets (+5% q-o-q) instead of loans (+0.3% q-o-q); we loans encouraging given its contraction over the past three quarters.
  • As with the industry, 2Q19 mortgage growth was lacklustre but DBS expects a reversal of the S$1bn contraction in housing loans in 1H19 given a 60% rise in bookings. Although full-year net new mortgages could end up flattish (previous guidance S$1bn-1.5bn), we believe that delayed corporate drawdowns in 2H19 may still support our 4% y-o-y expectations.

2Q19 credit weak macro.

  • DBS recorded outlook and is expected to be one-off. Minimal provisions were taken for new NPAs attributable to an Indonesian steel exposure; the bank does not anticipate further impairments as a letter of support had been received.
  • Going forward, the bank holds out for recoveries on its O&G portfolio but we are less optimistic.

Maintain HOLD; ROE target softened to “approaching 13%”.

  • We remain the impact from Fed rate cuts on ROE to just approach 13% (vs. 13% previously).
  • Key downside risks are sharper Fed rate cuts than expected.
  • DBS trades above mean at 1.3x FY19F P/BV (ROE: 12.5%)

Andrea CHOONG CGS-CIMB Research | LIM Siew Khee CGS-CIMB Research | https://research.itradecimb.com/ 2019-07-29
SGX Stock Analyst Report HOLD MAINTAIN HOLD 27.59 DOWN 27.640