DBS Group Holdings - OCBC Investment 2019-07-30: Post Results Management Update


DBS Group Holdings - Post Results Management Update

  • Cautious on NIMs outlook.
  • Digitalisation continues to be a strategic focus.
  • ROEs likely to see some pressure in 2H19.

DBS: 2Q beat consensus

  • DBS (SGX:D05) reported 2Q19 net earnings of S$1.60b, up 20% y-o-y and -3% q-o-q. This was higher than market consensus expectation for 2Q19 net earnings of S$1.51b (based on Bloomberg poll). This gives 1H19 net earnings of S$3.25b, +14% y-o-y.
  • Net Interest Income delivered an expected strong performance, up 9% y-o-y and 5% q-o-q to S$2.43b and accounted for 65.5% of total income. Non-interest Income also performed well, up 31% y-o-y and 3% q-o-q to S$1.28b. However, allowances rose from S$76m in 1Q19 to S$251m in 2Q19.
  • An interim dividend of 30 cents was declared.
  • Management is maintaining its outlook for 2019, that is, mid-single-digit loans growth, mid-single-digit basis point NIM improvement with modest impact from 2H interest rate cuts, high-single-digit percent income growth, cost-to-income ratio of 43%, and ROE approaching 13%. Please note that DBS trades ex-dividend on 5 Aug 2019. See DBS dividend history.
  • After the record 1H19 earnings release of SGD3.2bn driven by top line growth, NIM expansion (+3bps q-o-q in 2Q), treasury income and gains on investment securities, we met with senior management for a post results briefing.

Underlying business remains fairly strong, despite some macro uncertainties

  • Following the strong 1H earnings, the bank took the opportunity to buffer up and added to reserves to provide some cushion for potential future weakness. Credit costs (28bps in 2Q19) saw an uptick in 2Q19 but remains manageable. Underlying business including wealth management remained fairly strong, with no significant negative impact observed in Hong Kong operations despite street protests.
  • FY19 loan growth target ~4% still looks achievable given expectations for deferred corporate drawdowns. FY19 mortgage growth is likely to be subdued (~$1-1.5bn net new mortgage growth), although 2H may be better than 1H (2Q mortgage contracted slightly), given rise in bookings which should see drawdowns.

Cautious on NIM outlook

  • Cautious on NIM outlook (potentially could see 1-2 bps lower margin for every 25bps fed funds rate reduction) - Guidance for NIM was moved to mid-single digit “with modest impact from 2H interest rate cuts” (vs previous 4-5bps for full year). ROE outlook was toned down to “approaching 13%” for FY19 (vs prior 13% target).
  • With the Fed expected to cut rates twice in 2H19, management tone was guarded on NIM outlook although the CEO stressed that the effect of passthrough will be lagged and dependent on Fed rate moves next year.
  • Cost income ratio of 41.9% was better than guided, but is not expected to improve materially given continued investments needed (e.g. technology).
  • Dividends were also discussed with commitment for sustained dividends stream reiterated (DPS of 30Scts/quarter appears comfortable to maintain). See DBS dividend history.
  • Fair value is trimmed to SGD27.50 implying 1.4x price/book.

OCBC Research Team OCBC Investment Research | https://www.iocbc.com/ 2019-07-30
SGX Stock Analyst Report HOLD MAINTAIN HOLD 27.50 DOWN 28.000