DBS Group - CGS-CIMB Research 2019-12-09: Waiting On Wealth

DBS GROUP HOLDINGS LTD (SGX:D05)

DBS Group - Waiting On Wealth

We expect sustained wealth income from stronger foreign inflows to counter NIM compression. Trading volumes are volatile but have shown resilience.
The wax and wane of ongoing trade tensions will sway share prices but the impact is likely priced in. 14bp in GP buffers should buffer HK concerns.
Upgrade to ADD with GGM-based Target Price of S$28.29. Valuations are attractive at 1.2x FY20 P/BV. There is scope for higher dividends in FY19.

DBS GROUP (SGX:D05)’s margins have been the most resilient amongst peers in the face of multiple policy rate cuts in the region. That said, further compression is likely as S$ rates fall further in a fashion similar to 3MLIBOR. Nonetheless, we still expect some funding cost savings to moderate the compression (FD proportion 41%). Management guides for NIMs to narrow 7bp in FY20.
That said, stronger foreign currency deposit inflows of S$7.1bn over Jul-Sep 2019 give us reason to expect sustained (albeit gradual) wealth income flows over FY20, offsetting some of the margin weakness. We believe that Singapore’s position as the region’s safe haven will underpin continued inflows into the city state.

Asset quality of DBS’s portfolio has held steady, with average new NPA formation inching downwards on a y-o-y basis even through the course of US-China trade tensions. We understand that its HK portfolio has remained solid; most of the book is comprised of exposure to large conglomerates and Chinese SOEs, where cash flows have stayed largely stable while its SME portfolio is well secured.
To date, DBS has set aside 14bp in general provisions as precautionary buffers against macro weaknesses. This is the largest amount provided against geopolitical headwinds amongst peers and we believe this to be an adequate buffer against a further escalation in the HK situation. The bank is not counting HK out as a driver for growth, especially as a passageway into the Greater Bay Area, but the cloud of negative sentiment surrounding HK could take some time to clear.

Valuations have come off to a more reasonable 1.2x FY20 P/BV following the sell-off over Nov 2019 on trade war fears. In our view, US-China trade tensions have been drawn out and priced in. We think that the negativity on macro weaknesses and Fed rate cuts should also start dissipating as GDP growth recovers over FY20.
We see scope for a higher dividend payout in FY19 (currently: 50% payout ratio) given strong capital accretion amid the fall-though of its M&A deliberations for an Indonesian franchise and to aid ROE growth. In any case, c.5% yields are a key support factor for share price.
See DBS Share Price; DBS Target Price; DBS Analyst Reports; DBS Dividend History; DBS Announcements; DBS Latest News.
A re-rating catalyst is neutralisation in US-China trade tariffs while a downside risk is a significant escalation in HK uncertainties.

Andrea CHOONG CGS-CIMB Research | LIM Siew Khee CGS-CIMB Research | https://www.cgs-cimb.com 2019-12-09

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