DBS GROUP HOLDINGS LTD (SGX:D05)
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
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https://research.itradecimb.com/
2019-07-29
SGX Stock
Analyst Report
27.59
DOWN
27.640
