DBS Group Holdings - UOB Kay Hian 2019-07-12: 2Q19 Results Preview ~ Continued NIM Expansion, Stable Asset Quality

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

DBS Group Holdings - 2Q19 Results Preview ~ Continued NIM Expansion, Stable Asset Quality

  • We expect DBS (SGX:D05) to report net profit of S$1,452m for 2Q19, up 9% y-o-y but down 12% q-o-q (1Q19 boosted by S$100m write-back in general provisions).
  • We expect NIM to expand 2bp q-o-q due to higher mortgage rates. Wealth management fees were affected by poor market sentiment. Asset quality is stable and specific provisions remain within guidance of 20-25bp.
  • Maintain BUY. Target price: S$30.50.



WHAT’S NEW


On track to achieve mid-single-digit loan growth for 2019.

  • We expect DBS GROUP HOLDINGS LTD (SGX:D05) to report a moderate loan growth of 1.0% q-o-q and 3.7% y-o-y in 2Q19, driven largely by non-trade corporate loans.
  • We expect residential mortgages to have contracted slightly q-o-q due to lacklustre new sales and on-going repayment of existing housing loans.

NIM expansion driven by higher mortgage rates.

  • DBS raised its fixed home rate (FHR) by 40bp in Apr 19. Its 2-year fixed rate housing loans also got re-priced higher after the initial 2-year period with fixed interest rates. DBS would benefit from higher loan yield for its S$ loan book. We expect NIM expansion of 5bp y-o-y and 2bp q-o-q to 1.90% in 2Q19.

Softer wealth management offset by pick-up in investment banking.

  • Financial markets the escalation in trade in 2Q19, which resulted in nasty in May. Thus, we expect wealth to have declined 813% q-o-q due to the weak market sentiment.
  • DBS completed the IPOs for ARA US Hospitality Trust (SGX:XZL) and Eagle Hospitality Trust (SGX:LIW) as lead manager, which raised S$677m and S$770m respectively in 2Q19. We expect steady growth from credit cards. Overall, we expect fees to have marginally declined 1% y-o-y and 4% q-o-q to S$699m.
  • We expect net trading income to have normalised to S$250m in 2Q19, after clocking S$443m in a seasonally strong 1Q19.

Maintaining cost efficiency.

  • We operating expense have increased 74% y-o-y. We cost-to-income ratio (CIR) at 44% 2Q19 (management’s guided CIR of 43% for 2019).

Asset quality stable.

  • We expect formation stay. We expect ratio to be stable at 1.49%. Exposures to the oil & gas (O&G) sector have been adequately provided and we do not expect any on legacy O&G exposures.
  • We expect specific provisions at 22bp, in line with management guidance of 20-25bp. We expect total credit cost at 25bp for 2Q19.


STOCK IMPACT


Weathering uncertainties created by trade negotiations.

  • We forecast net profit of S$1,452m for 2Q19, up 912% q-o-q (1Q19 was boosted by S$100m write-back in general provisions). DBS continues to benefit from NIM expansion generated by higher mortgage rates and benign asset quality in 2Q19.

Evolving into yield play.



EARNINGS REVISION/RISK

  • We keep our 2019 net profit forecast relatively unchanged.


VALUATION/RECOMMENDATION


Maintain BUY.

  • Our target price of S$30.50 is based on 1.59x 2019F P/B, derived from the Gordon Growth model (ROE: 12.6%, COE: 8.5% (beta: 1.15x), Growth: 1.5%).


SHARE PRICE CATALYST

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





Jonathan KOH CFA UOB Kay Hian Research | https://research.uobkayhian.com/ 2019-07-12
SGX Stock Analyst Report BUY MAINTAIN BUY 30.500 SAME 30.500



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