DBS Group - CGS-CIMB Research 2019-11-11: Offsetting Margin Weakness With Trade

DBS GROUP HOLDINGS LTD (SGX:D05)

DBS Group - Offsetting Margin Weakness With Trade

Elevated trading gains and wealth management income in 3Q19 offset the 1bp NIM compression and additional 7bp credit cost for macro weakness.
2020 guidance: c.4% loan growth, c.7bp NIM compression, and credit costs on par with 2019's (20-22bp). Wealth and fee incomes should sustain.
Maintain HOLD with a higher Target Price of S$28.29 as we lift FY20F ROEs to 12.4%.
Negativity on macro weakness and Fed rate cuts should start dissipating but we look to enter on more palatable valuations closer to c.1.2x P/BV or S$25.

DBS GROUP HOLDINGS LTD (SGX:D05)'s 3Q19 net profit of S$1.63bn (+1.6% q-o-q,+15% y-o-y) was 6%/11% above our/Bloomberg consensus estimates. The beat was mainly from strong trading income (+21% q-o-q, +22% y-o-y) as the pick-up in the yield curve allowed for gapping opportunities. 9M19 formed 80%/79% of our/consensus FY19 forecasts. See DBS Announcements; DBS Latest News.
DBS declared DPS of S$0.30 for 3Q19. See DBS Dividend History.

DBS’s NIMs dipped 1bp q-o-q to 1.9% in 3Q19; underlying NIMs declined but this was offset by sustained margins from the treasury markets. Further compression in 4Q19, on the back of the additional US Fed rate cut in Oct 2019 (DBS expected two cuts) and expedited timeline of the cuts (the Jul 2019 cut was earlier than expected), tempers DBS’s expectations of a y-o-y NIM expansion to +3bp (from 4-5bp previously) in FY19 and -7bp in FY20.
We cut our FY20/21F NIM forecasts by 4/6bp to 1.83%/1.81% as we factor in the Fed cut transmission into S$ rates. The neutralization of US-China tensions is a key re-rating catalyst while escalation of the HK unrest is a key downside risk.

Stronger customer flows pushed DBS’s wealth income to a record high of S$357m in 3Q19 on the back of continued asset under management (AUM) growth to S$241m (+3% q-o-q, +9% y-o-y).
We view it reasonable to expect wealth income to hold up at a new normal level of c.S$335m (9M19 avg. vs. FY18’s S$285m) as the region hosts further wealth creation and as Singapore becomes a more vital constituent of regional flows.

DBS recorded 28bp credit costs in 3Q19 – 21bp of SPs (within guidance) and 7bp of GPs for the ongoing uncertainties in HK. This brings 9M19 GPs for macro weaknesses to 14bp, a comfortable buffer to weather HK delinquencies if need be; we do not expect further top-ups. Loans to large conglomerates in its HK portfolio had stayed solid while its SME book is well collaterised.
We expect FY20F credit costs to hold steady at 22bp.

Going into FY20, we believe the negative sentiment surrounding Fed rate cuts should dissipate as regional macro weakness plays out in 1H20F.
We raise our Target Price as we increase FY20F ROE to 12.4% (from 11.3%) and look to Add on firmer dividend upside. See DBS Share Price; DBS Target Price.

DBS expects loan growth to hold at around 4% in FY20F, supported by corporate real estate and M&A activities; housing loans should recover from the FY19F contraction as well. Barring the uncertainties, DBS maintains a positive medium-term view on HK as it leverages more into the Greater Bay Area.
DBS’s 3Q19 analyst briefing largely focused on uncertainties (and potential delinquencies) regarding Hong Kong (c.16% of loan book). The bank’s HK exposure comprises mostly of loans to large China/HK conglomerates – credit quality of this book has stayed solid. DBS’s SME book in HK is well secured against property while mortgages amount to just c.HK$22bn (c.6% of HK book). Stress-testing this portfolio against a 40% drop in real estate prices revealed a manageable impact.
DBS stresses that most of the impact on tourism, retail, and hospitality sectors in HK affect deposit levels as these industries were not traditionally highly leveraged to begin with. Its HK$ and US$ deposit levels remain well-managed and expanded q-o-q in 3Q19.

The bulk of DBS’s HK exposures are loans to large Chinese and HK conglomerates which have remained solid. Its SME loan book (mostly to export-oriented manufacturing companies in China) is largely secured by property. The bank’s internal stress tests found that the impact from a c.40% decrease in property values would be benign on its books.
3Q19 NPA formation was heftier at S$360m (vs. 1H19: S$218m) but was idiosyncratic as the bulk of new SPs stemmed from a corporate NPL to the transportation sector.
Meanwhile, DBS expects to recover part of the GPs for macro weaknesses if conditions improve in FY20, providing some upside to its credit costs. All in, we expect credit costs to hold broadly steady at around 22bp in FY20.

DBS reiterates that its M&A stance has not changed. It weighs several conditions when considering a deal. They include strategic fit (fitting into one of its growth markets or business lines), value accretive over a reasonable period of time (the bank’s acquisition of ANZ’s wealth franchise as a reference point of a successful integration), and non-disruptive to its key agenda of using digital as a means of organic growth.
We think that the bank’s CET-1 ratio of 13.8% (amply above its targeted range of 12.5-13.5%) allows room for a bolt-on acquisition of an Indonesian franchise, but unfavourable market conditions could push the bank towards an increased dividend payout above the current 50%. See DBS Dividend History.

Andrea CHOONG CGS-CIMB Research | LIM Siew Khee CGS-CIMB Research | https://www.cgs-cimb.com 2019-11-11

SGX Stock Analyst Report HOLD MAINTAIN HOLD 28.29 UP 27.590