DBS Group Holdings - OCBC Investment 2019-07-23: NIM Headwinds Ahead

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

DBS Group Holdings - NIM Headwinds Ahead

  • DBS' 2Q earnings recovery still expected.
  • NIM headwinds to become evident from late 2H19.
  • Fair value is adjusted to S$28.



Adjusting fair value to S$28 in view of lower rates ahead

  • While 2Q19 earnings recovery is still expected (DBS' next results release expected on 29th July), supported by net interest margins (NIMs) expansion on the back of mortgage repricing and benign asset quality trends, we expect increasing headwinds from lower rates to pressure net interest income over the course of 2H19 and are adjusting our fair value to SGD28, implying ~1.4x price/book (close to the sector’s long term historical average multiple and +1 s.d. to its own 10-year historical average valuation range).


DBS is expected to be relatively more sensitive to impending rate cuts (than UOB)

  • DBS (SGX:D05) has benefited more than local peers during the past cycle with NIMs gaining ~20bps since 2H2014 and is expected to be more sensitive to impending rate cuts (given its higher loan deposit ratio of 87.9%, and higher estimated exposure of > 80% of gross loans in US-rates related currencies e.g. USD, HKD, SGD, versus ~66% estimated for UOB).


Management remained confident in sustaining ROE

  • In recent investor meetings, management remained confident in sustaining returns on equity ratio (ROE) this year at 12.5%, although the outlook into next year is less certain, depending on interest rates and US-China trade negotiations.
  • Management also noted the pick up in mortgage competition in Singapore (DBS has lowered its new mortgage pricing by about 10 to 15 basis points), but expects minimal near-term impact on the overall loan book.
  • Loan provisions made last year in the wake of China-US trade tensions is viewed as sufficient at this point and the hence the credit cost guidance of 20bps is unchanged.
  • Overall earnings trajectory remains supportive with 50% dividend payout maintained. See DBS's dividend history.
  • Next quarterly results is expected on 29 July.





OCBC Research Team OCBC Investment Research | https://www.iocbc.com/ 2019-07-23
SGX Stock Analyst Report HOLD DOWNGRADE BUY 28.00 DOWN 29.200



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