DBS Group - OCBC Investment 2020-04-30: Quarterly Dividend Maintained


DBS Group - Quarterly Dividend Maintained

  • DBS (SGX:D05)'s 1Q20 total income gained +13% y-o-y, crossing $4bn for the first time. 1Q20 net profit fell -29% y-o-y.
  • Total allowances were raised pre-emptively to manage risks from the ongoing pandemic, with more provisions expected ahead.
  • NIMs pressure from 2Q, credit costs to rise 80- 130bps cumulatively over next two years.
  • While 1Q’s quarterly dividend of 33 Scts/share was unchanged and provides some near term relief to DBS Share Price, we expect upcoming quarters to provide better clarity on the impact of the viral outbreak and NIMs pressure as the lagged impact from recent rate cuts passes through.

DBS 1Q20 results in line

  • DBS' 1Q20 total income gained +13% y-o-y, crossing $4bn for the first time driven by healthier business momentum in the earlier part of 1Q and gains from investment securities. 1Q net profit fell -29% y-o-y/-23% q-o-q to SGD1.165bn. See DBS Announcements.
  • Profit before allowances of SGD2.47bn was 20% higher from a year ago, supported by fee income growth of +14% y-o-y to SGD832mn (driven by 28% increase in wealth management fee, 17% rise in loan related fees and 64% gains in investment banking fees, while card fees declined with lower transactions) and net interest income +7% y-o-y (+2% q-o-q to SGD2.48bn).
  • DBS' 1Q loans grew 1% q-o-q to SGD369bn, driven by non-trade corporate loans (+5%), while NIM was stable at 1.86%. Cost discipline was maintained with cost-income ratio of 39% (from 4Q19's 46% & 42% a year ago). CET1 remained solid at 13.9% (vs 4Q19’s 14.1%), which the bank expects should not dip significantly below target range of 12.5-13.5%.

Increased total allowances to pre-empt risks from ongoing pandemic and strengthen the balance sheet

  • DBS' NPL rate was up to 1.6% (from 1.5% in prior quarter), while 1Q new NPA formation of about ~SGD1bn increased sharply from previous average quarter of around SGD320mn.
  • Total allowances of SGD1.09bn were taken to accelerate the buildup of reserves, two thirds of which were for general allowances (which was increased +29% or $0.7bn to $3.23bn) and one-third ~SGD383mn was for specific allowances (new exposures recognized as non-performing in the quarter-likely to include Hin Leong).

1Q20 quarterly dividend was maintained at 33 Scts, providing some relief for its share price.

  • Earnings generation is expected to be adequate for maintaining quarterly DPS at this point (est. higher dividend payout ratio ~73.5%), although management will continue to assess the impact of Covid-19 on financial performance and adjust dividend policy if needed. See DBS Dividend History.

DBS management revised its guidance lower given the deteriorated macro outlook, expecting a gradual recovery in 2H20 & muted growth in 2021

  • Base case is for lockdowns in major economies to cease around middle of 2020. In a stress scenario, the bank expects lockdowns to last until end 3Q20, with gradual recovery only kicking in from end 2020 and 2021 activities materially below 2019 levels.
  • Looking ahead, the bank believes 1Q profit before allowances growth (20%) should provide some buffer for 2020 full year profits, which is expected at around 2019’s levels after factoring in declines for rest of the year. NIMs should see pressure ahead. 1Q credit costs increased to 118 bps, versus 4Q’s 14bps of loans.
  • Credit costs are expected to rise 80- 130bps cumulatively over next two years ($3-5bn). Business volumes have been holding up, with trade loans affected but healthy non-trade corporate loan pipeline from top end customers and largely stable housing and consumer loans expected. Fee income likely to trend lower. Expenses will be tightened.

More details given on loans exposure impacted by Covid-19 outbreak

  • DBS expects similar credt cost outlook to 2002/3 recession and 2008-9 GFC periods. After the moratorium period ends this year, the bank is watchful for some worsening of client profiles next year.
  • Curent loan composition is corporates ~59%, consumer ~30% and SMEs ~10%. The bank estimates 10% of its SME loans are to highly impacted industries such as hotels, food and beverage and retailers, while about 20% of its large corporates loans are under monitoring (~$46bn of loans, of which oil and gas is about $23bn).
  • Industries identified to be more directly impacted by the slowdown are: oil & gas, aviation, hotels, tourism, retail, food & beverage, shipping and gaming/cruise ships. Loans to the oil and gas sector of $23bn accounts for ~6% of total loans, with exposure across producers, processors, traders and support services.

HOLD maintained on a subdued outlook ahead

OCBC Research Team OCBC Investment Research | https://www.iocbc.com/ 2020-04-30
SGX Stock Analyst Report HOLD MAINTAIN HOLD 20.00 DOWN 25.500