DBS 3Q19 Results Preview - UOB Kay Hian 2019-10-29: NIM Compression But Asset Quality To Remain Benign

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

DBS 3Q19 Results Preview - NIM Compression But Asset Quality To Remain Benign

  • We expect NIM to recede 2bp q-o-q in 3Q19 due to lower interest rates. Wealth management fees are expected to grow 9.6% y-o-y due to continued expansion of AUM. We expect robust net trading income of S$300m.
  • We forecast net profit of S$1,496m for 3Q19, up 5.7% y-o-y but down 6.7% q-o-q.
  • DBS is a beneficiary of the partial trade deal between the US and China as Greater China accounted for 29.9% of its total loans and 27.1% of total income in 2Q19.
  • Maintain BUY. Target price: S$29.75.



WHAT’S NEW


On track for mid-single-digit loan growth in 2019.

  • We expect DBS GROUP HOLDINGS (SGX:D05)’s loan growth at 4% y-o-y and 1% q-o-q in 3Q19, driven by non-trade corporate loans. Corporate loans would likely be driven by the building & construction and transport, storage & communications segments. Bookings for residential mortgages have picked up in 1H19 but the pace of loan drawdown was trepid in 3Q19. (see DBS Announcements.)

Narrower margins post rate cuts.

  • We expect NIM to have expand 3bp y-o-y but compressed by 2bp q-o-q to 1.89%. The 3-month SIBOR and SOR have receded slightly to 1.88% (3Q19: -12bp) and 1.68% (3Q19: -15bp) respectively as at end-Sep 19 due to two rate cuts totalling 50bp from the Fed. However, DBS has maintained interest rates for fixed deposits in Singapore at 1.4% (fixed deposits accounted for only 11.1% of its S$ deposits).

Fees held up well.

  • We expect wealth management fees to have grown 9.6% y-o-y to S$320m, supported by continued growth in AUM. We expect fees from trade and loans related activities to be relatively flat q-o-q. Overall, we expect net fees & commission to be up 1.5% y-o-y but down marginally by 1.6% q-o-q.
  • We expect net trading income to remain fairly resilient at S$300m (2Q19: S$357m).

Asset quality remained stable.

  • We see NPL formation to be slightly more elevated at 33.6bp (2Q19: 31.3bp). We expect NPL ratio to have edged up by 2bp to 1.54%. We see credit cost at 28bp, similar to 2Q19’s.


STOCK IMPACT


Beneficiary of partial trade deal between the US and China.

  • We forecast net profit of S$1,496m for 3Q19, up 5.7% y-o-y but down 6.7% q-o-q (2Q19’s earnings boosted by gains on investment securities of S$131m).
  • DBS is a beneficiary of the partial trade deal between the US and China as Greater China accounted for 29.9% of total loans and 27.1% of total income in 2Q19.

Banks are yield plays.

  • DBS provides an attractive dividend yield of 4.8% based on our forecast DPS of S$1.20 for 2019. See DBS Dividend History.


EARNINGS REVISION/RISK

  • We trim our net profit forecasts by 1.1% for 2019 and 2.9% for 2020 due to lower interest rates.


VALUATION/RECOMMENDATION

  • Maintain BUY. Our target price of S$29.75 is based on 1.56x 2019F P/B, derived from the Gordon Growth model (ROE: 12.2%, COE: 8.0% (beta: 1.1x), Growth: 0.5%). (see DBS Share Price; DBS Target Price)


SHARE PRICE CATALYST






Jonathan Koh CFA UOB Kay Hian Research | https://research.uobkayhian.com/ 2019-10-29
SGX Stock Analyst Report BUY MAINTAIN BUY 29.75 DOWN 31.300



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