DBS 1Q20 Results Preview - UOB Kay Hian 2020-04-17: Held Up By Healthy Growth In January & February


DBS 1Q20 Results Preview - Held Up By Healthy Growth In January & February

  • We forecast DBS (SGX:D05)'s net profit of S$1,236m for 1Q20, down 25.1% y-o-y and 18.0% q-o-q. We expect mild NIM compression of 2bp q-o-q and mid-single-digit growth in fees of 6.3% y-o-y. We expect a surge in credit costs to 60bp (2019: 18bp), driven by higher general provisions.
  • We foresee DBS adopting a conservative stance to trim dividends by 9.1% to 30 S cents per quarter, supported by reactivating its scrip dividend scheme.

Growth in corporate loans.

  • We expect moderate loan growth at 4.2% y-o-y and 1.1% q-o-q in 1Q20, driven by corporate loans.

Mild NIM compression in 1Q20.

  • We expect NIM to have edged down by 4bp y-o-y and 2bp q-o-q to 1.84% in 1Q20. The Federal Reserve (FED) had cut FED Funds Rate by a total of 150bp in March, which had resulted in the 3-month SIBOR and SOR falling 69bp and 32bp respectively to 1.00% and 0.92% during March.
  • Corporate loans are re-priced with a lag of 1-2 months. Thus, DBS will experience the full brunt of NIM compression in 2Q20.

Healthy growth in fees.

  • We expect DBS to have achieved mid-single-digit growth in fees of 6.3% y-o-y in 1Q20. We expect contributions from Wealth Management to have increased by 11% y-o-y due to positive sentiment in January and February. We expect a decline in contributions from cards of 5% y-o-y, hampered by curbs on overseas travel.
  • We expect net trading income to have been seasonally stronger at S$320m, supported by healthy customer flows driven by active hedging of foreign exchange and interest rate risks in a volatile operating environment.

Maintaining cost efficiency.

  • We expect operating expenses to have increased by 4.8% y-o-y. We estimate cost-to-income ratio at 43.8% for 1Q20.

Expect surge in general provisions.

  • We expect a pick-up in DBS's general provisions caused by:
    1. deterioration in macroeconomic variables, and
    2. more loans downgraded from stage 1 to stage 2, which requires more provisions based on lifetime expected credit loss.
  • We expect specific provisions to have been stable at 22bp, in line with recent quarters. Overall, we expect credit costs to hit 60bp in 1Q20 (2019: 18bp).
  • We have assumed new NPLs of S$971m during the quarter (4Q19: S$575m). We expect NPL ratio to have deteriorated by 20bp q-o-q to 1.69%.

Held up by healthy growth in January and February.

  • We forecast net profit of S$1,236m for 1Q20, down 25.1% y-o-y and down 18.0% q-o-q.

The COVID-19 pandemic is upon us.

  • The COVID-19 pandemic is expected to last for a prolonged period of time, compared to previous expectations that it will last till summer. Thus, management will provide a new set of guidance on financial performance and its implication on dividend policy when DBS announces its 1Q20 results on 30 Apr 20.
  • DBS will provide an abridged version of its usual quarterly results with performance summary, profit & loss statement and key financial ratios.

AGM to be held shortly.

  • DBS has announced a new date for its AGM on 30 Apr 20 (2:30pm). See DBS Announcements. Shareholders will cast their votes on all resolutions, including the final dividend, using proxy forms. If approved, final dividend of 33 S cents will be paid on 26 May 20.

Expect trimming of dividends.

  • We expect DBS to reduce dividends by 9.1% to 30 S cents per quarter due to the impending slowdown in economic growth and potential recession caused by the COVID-19 pandemic. We expect dividend payout ratio to be elevated at 69% in 2020. See DBS Dividend History.
  • We expect DBS to turn on its scrip dividend scheme with issue price of new shares set at a 10% discount to prevailing market prices.

Potential repercussion from collapse in crude oil prices.

Jonathan KOH CFA UOB Kay Hian Research | https://research.uobkayhian.com/ 2020-04-17
SGX Stock Analyst Report BUY MAINTAIN BUY 22.1 UP 21.800