DBS Group - Maybank Kim Eng 2019-07-29: Resilient, But Not Immune; Downgrade To HOLD

DBS GROUP HOLDINGS LTD (SGX:D05)

DBS Group - Resilient, But Not Immune; Downgrade To HOLD

DBS (SGX:D05)’s 1H19 core earnings were in line with MKE, but ahead of Street.
NIMs expanded, fee income widened and costs fell. Together these delivered a 17% y-o-y expansion in 2Q19 core earnings. This testifies to its post-GFC structural evolution from a trading-oriented universal bank to a less cyclical commercial bank. Yet 2Q19 total NPLs increased 3.3% y-o-y – the fastest since 3Q17 – pointing to trade war-related macro headwinds, particularly in Singapore, HK/China & SE Asia.

With increased uncertainty from slower economic growth, potential rate cuts and souring asset quality, we lowered 2019E-2021E earnings by 5-7%. Our multi-stage DDM target price has been lowered from SGD29.46 to SGD28.05.
DBS share price has risen 13% YTD. With just 4% upside, downgrade to HOLD.

While DBS's 2Q19 NPL ratio fell 10bps y-o-y to 1.5%, we note a 2.5x q-o-q increase in new NPL formation. Bad loans in sectors such as manufacturing (+11% y-o-y), building & construction (+10%) and general commerce (+10%) saw notable advances.
Given MKE Economics team’s trade war-related bearish outlook for the region, particularly recession fears in Singapore, as well as uncertainty in HK/China, we raised 2019E- 2020E provisioning costs by 38-50%. This puts average credit charges for this period (30bps vs. 20bps earlier) close to the past 5-year cycle.

DBS's reported in 2H19, albeit at a slower pace.
Loans expanded 4% y-o-y despite mortgages mortgage bookings are up 60% y-o-y, implying downside support forward, we growth assumptions by 160-190bps to take in to account the macro slowdown.
Potential Fed rate cuts have us lowering NIMs by 2-10bps for the same period.

Our in 5-7% lower core earnings for 2019E- 2021E. As a result, we cut our multi-stage DDM target price (COE 10.3%, 3% terminal) 5% to SGD28.05.
With 4% upside, we downgrade DBS to HOLD.

Thilan Wickramasinghe Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2019-07-29

SGX Stock Analyst Report HOLD DOWNGRADE BUY 28.05 DOWN 29.460