DBS 4Q19 Results Preview - UOB Kay Hian 2020-02-07: Seasonally Slower Quarter

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

DBS 4Q19 Results Preview - Seasonally Slower Quarter

  • We forecast net profit of S$1,405m for 4Q19, up 6.5% y-o-y (on a low base) but down 13.8% q-o-q (seasonal pullback). We expect NIM compression of 4bp q-o-q, fee income growth of 23.6% y-o-y and stable credit cost of 25bp.
  • The SARS outbreak in 2003 had limited impact on DBS’ asset quality. Contrary to widely-held perception, DBS’ NPL ratio improved 1.0ppt to 5.7% in 2003.
  • We expect quarterly dividend to improve 6.7% to 32 S cents.
  • Maintain BUY. See DBS Target Price.



WHAT’S NEW


Moderation in loan growth.

  • We forecast DBS Group (SGX:D05) to report a moderate loan growth of 3.7% y-o-y and 1.2% q-o-q in 4Q19 with broad-based growth in corporate loans, trade loans and housing loans (drawdown for strong bookings in 2Q19 and 3Q19).

NIM compression.

  • We expect NIM to narrow by 1bp y-o-y and 4bp q-o-q to 1.86%. Loan yield had eased as the 3-month SIBOR and SOR receded 11bp and 14bp q-o-q to 1.77% and 1.54% respectively. Competition for housing loans has also intensified.

Maintained growth momentum for wealth management and credit cards.

  • We see growth momentum maintained for wealth management fees within continued growth in AUM, while fees from credit cards saw the seasonal up-tick. However, loan-related fees would likely be muted. Overall, we expect fees & commissions to increase 23.6% y-o-y (low base in 4Q18) but recede 3.6% q-o-q (seasonal weakness).
  • We expect net trading income to be seasonally lower at S$230m.

Slightly positive JAWS.

  • We expect operating expense to have increased 7.8% y-o-y. Cost-to-income ratio (CIR) was seasonally higher at 46.0% (4Q18: 46.3%, 3Q19: 42.2%). Pre-provision operating profit (PPoP) could have increased 9% y-o-y to S$1.9b.

Stable asset quality.

  • We expect NPL ratio to have been stable at 1.56%. We estimate credit cost at 25.1bp, slightly lower than the 28.5bp in 3Q19.


STOCK IMPACT


Beneficiary of partial trade deal between the US and China.

  • We forecast net profit of S$1,405m for 4Q19, up 6.5% y-o-y (low base) but down 13.8% q-o-q (seasonal pullback). DBS is a beneficiary of the partial trade deal between the US and China as Greater China accounted for 30.4% of its total loans and 27.1% of total income in 3Q19.

Limited impact during SARS outbreak.

  • The outbreak of the severe acute respiratory syndrome (SARS) during 2003 had limited impact on DBS’ asset quality and financial performance. NPL ratio receded from 6.7% in 2002 to 5.7% in 2003. Credit cost was stable at 83.7bp in 2003. In fact, loan loss coverage gradually improved to 88.6% in 2004.
  • Net profit was stable at S$1,025m in 2003 but surged 97% in 2004, driven by growth in non-interest income.

Banks are yield plays.

  • We expect DBS to raise DPS to S$1.28 for 2020 (S$0.32 per quarter), which represents dividend payout ratio of 54.5%.
  • DBS provides attractive dividend yields of 4.7% for 2019F and 5.0% for 2020F. See DBS Dividend History.


EARNINGS REVISION/RISK

  • We trim our net profit forecast for 2020F by 2.1% due to a higher credit cost of 27.5bp (previously 25.1bp).


VALUATION/RECOMMENDATION

  • Maintain BUY. Target price is based on 1.41x 2020F P/B, derived from the Gordon Growth model (ROE: 12.0%, COE: 8.5% (beta: 1.2x to 1.3x), Growth: 0.0%). See DBS Target Price.


SHARE PRICE CATALYST

  • Partial trade deal between the US and China.
  • Improvement in CIR due to digitalisation and strategic cost management initiatives.





Jonathan KOH CFA UOB Kay Hian Research | https://research.uobkayhian.com/ 2020-02-07
SGX Stock Analyst Report BUY MAINTAIN BUY 28.65 UP 30.000



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