DBS Group Holdings 2Q19 - UOB Kay Hian 2019-07-30: Broad-Based Growth Despite Headwinds

DBS GROUP HOLDINGS LTD (SGX:D05)

DBS Group Holdings 2Q19 - Broad-Based Growth Despite Headwinds

Net interest income increased 9.2% y-o-y due to moderate loan growth of 3.7% y-o-y and NIM expansion of 6bp y-o-y. Non-interest income was above expectations due to fees & commissions (+8.6% y-o-y), net trading income (+57.3% y-o-y) and gains from investment securities of S$130m.
We see the impact of lower interest rates offset by improved cost efficiency.
Maintain BUY on DBS. Target price: S$31.30.

DBS GROUP HOLDINGS LTD (SGX:D05) reported net profit of S$1,603m (+20% y-o-y and -3% q-o-q), 10% above our expectations of S$1,452m.

Loan growth was moderate at 1% q-o-q and 3.7% y-o-y (+5% y-o-y on constant currency terms) in 2Q19. The sequential expansion came from non-trade corporate loans and trade loans (housing loans contracted 0.8% q-o-q). NIM expanded 6bp y-o-y and 3bp q-o-q to 1.91% due to higher interest rates in Singapore and Hong Kong.
DBS also raised its fixed home rate (FHR) by 40bp in Apr 19, the second hike in mortgage interest rates this year.

Fees & commissions expanded 9% y-o-y in 2Q19, driven by wealth management (+11% y-o-y), cards (+16% y-o-y) and investment banking (+44% y-o-y). Contribution from wealth management was resilient due to growth in AUM of 8% y-o-y to S$234b.
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.

DBS registered strong net trading income of S$357m, up 57% y-o-y, due to gains from interest rates and forex activities. It also recognised gains on investment securities of S$131m.

NPL balance increased 3.3% q-o-q due to Singapore and South & Southeast Asia (manufacturing +11% q-o-q and general commerce +10% q-o-q). The increase in NPLs for South & Southeast Asia was due to a government-linked company in Indonesia. NPL ratio edged marginally higher by 3bp q-o-q to 1.52%.
Specific provisions increased 94% y-o-y to S$190m due to write-back of S$65m from sale of oil & gas support service vessel in 2Q18.
The board has declared an interim dividend of 30 S cents for 2Q19.

Management expects loan growth to pick up in 2H19, driven by non-trade corporate loans (deals that were deferred in 1H19 get pushed into 2H19) and residential mortgages. Bookings for residential mortgages rebounded 60% q-o-q to S$2.5b in 2Q19, driven by new loans and refinancing. DBS will benefit from the drawdown of new residential mortgages in 2H19.
Management expects the mortgage book to reverse from contraction of S$1b hoh in 1H19 to expansion of S$1b hoh in 2H19 (residential mortgages flat on a full-year basis). DBS has already raised its FHR by 15bp in Jan 19 and 40bp in Apr 19.
Going forward, it will benefit as its two-year fixed rate housing loans (25% of mortgage book) get re-priced higher after the initial two years of fixed interest rates.

US GDP growth was slower in 2Q19, with strength in consumer spending and labour markets offset by weakness in business investment. Management expects two 25bp interest rate cuts in July and September (described as insurance cuts), after which the Fed will respond based on incoming data. Based on this scenario, management expects NIM compression of 1bp q-o-q in 3Q19 and 1-2bp q-o-q in 4Q19. Management expects average NIM for 2019 to be about 1.90%, which is an expansion of 5bp compared with 1.85% in 2018.
Management expects high single-digit growth in total income for 2019, boosted by strong 1H19. Cost-to-income ratio should improve 1ppt to 43%. Specific provisions are expected to be below through-cycle average at 20-21bp. ROE is expected to approach 13%.

The three local banks have invested heavily in IT over the past 3-4 years. Areas traditionally targeted by digital banks, such as lending, wealth management, credit cards and payments, are already well served by incumbent banks. For unsecured personal loans, new digital banks could compete with money lenders, but this is a high-risk segment with high delinquency rate. MAS impose a strict limit on unsecured lending at four times of monthly income. New digital banks could also target micro SMEs, but this is a very small market.
Management highlighted that MAS will not allow digital banks to engage in value-destructive competition to gain market share (digital banks must demonstrate sustainable business model). New digital banks could also suffer from high cost for customer acquisition.

We raised our 2019 net profit forecast by 2.7% after factoring in the stronger numbers in 2Q19.

Our target price of S$31.30 is based on 1.64x 2019F P/B, derived from the Gordon Growth Model (ROE: 12.5%; COE: 8.0%; (beta: 1.1x); Growth: 1.0%).
We adjusted risk-free rate down from 2.75% to 2.5% and toned down terminal growth from 1.5% to 1.0%.

Jonathan KOH CFA UOB Kay Hian Research | https://research.uobkayhian.com/ 2019-07-30

SGX Stock Analyst Report BUY MAINTAIN BUY 31.30 UP 30.500