DBS Group - Maybank Kim Eng 2019-11-11: Yielding Results; Upgrade To BUY


DBS Group - Yielding Results; Upgrade To BUY

Resilient results. High dividend visibility

  • DBS GROUP (SGX:D05)’s 9M19 core earnings were well ahead of MKE/Street estimates due to higher non-interest income and better cost management. See DBS Announcements; DBS Latest News.
  • In our view, the group’s post GFC fundamental shift towards commercial banking from volatile universal banking is bearing fruit with a business mix that can effectively navigate regional uncertainty.
  • Interest income, fees and trading all delivered despite a tough macro backdrop given the HK unrest, trade war and slowing Singapore.
  • DBS’ dividends are on track to meet our expectations in 2019E. With CET1 at 13.8% - higher than the 13.5% management comfort level – it can also potentially surprise on the upside. See DBS Dividend History.
  • Together with good dividend visibility in 2020E, we upgrade DBS to BUY with a higher Target Price of SGD29.92 following post-3Q19 changes.

Fundamental drivers delivering

  • DBS’ fee income increased 17% y-o-y, led by wealth management (+22% y-o-y) and transaction services (+7% y-o-y) – areas that should have less volatility through the cycle. Its strong domestic franchise enabled a 6% y-o-y increase in low-cost current accounts and helped maintain a CASA mix of over 58% of total deposits, providing a funding cost advantage. Despite this, we estimate NIMs may fall 5bps y-o-y in 2020E due to lower interest rates, but this should be partly offset by continued loan growth, especially outside Singapore.
  • Separately, DBS’ cost-to-income ratio fell 170bps y-o-y, pointing to the investments made to improve efficiency, especially through technology. To reflect this, we have lowered our 2019- 2021E opex assumptions by 2-3%.

Asset quality – especially HK – needs to be watched

  • At 29bps credit charges were flat y-o-y. While provisions increased, this was mostly for general provisions to take account of increased macro uncertainty – especially in HK. In fact, the NPL ratio fell 10bps y-o-y to 1.5%.
  • Any specific sectoral distress is so far absent, according to management. In this backdrop, we have lowered our 2020-2021E credit charge assumption by 1-16%, but remain cautious going in to this part of the cycle.

Upgrade to BUY with higher Target Price of SGD29.92

  • Our post-3Q19 adjustments taking in to account higher non-interest income, lower NIMs and credit charges sees us raising 2019-2020E core earnings by 1-6%, while we lower 2021E by 2%.
  • We roll forward our multi-stage DDM (COE 10.3%, 3% terminal) valuation to 2020E to arrive at a new Target Price of SGD29.92. See DBS Share Price; DBS Target Price.
  • With 12% upside, upgrade to BUY.

Thilan Wickramasinghe Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2019-11-11
SGX Stock Analyst Report BUY UPGRADE HOLD 29.92 UP 28.050