DBS 1Q20 - Maybank Kim Eng 2020-04-30: Navigating A Crisis

DBS GROUP HOLDINGS LTD (SGX:D05)

DBS 1Q20 - Navigating A Crisis

DBS (SGX:D05)’s 1Q20 trading update came in-line with Street and below MKE expectations.
Operationally, the group remained resilient with growth across all income categories. Of course this should soften as Covid-19 recession bites, but DBS’ diversified geographic exposure, high quality client franchise, competitive funding and strong technology infrastructure should provide some cushioning in the near term, while also affording long-term structural advantages for market share gains.

We have raised credit costs to mid-way between Management’s base case and worst case guidance and lowered 2020-2023E PAT by 3-5%. But our 7% dividend yield expectations remain intact supported by strong capital buffers.
Maintain BUY on higher Target Price of SGD22.10 (vs. 21.99) based on multi-stage DDM (COE 10.3%, 3% terminal).

DBS's net loans expanded 6% y-o-y driven by non-trade corporate lending. Management claims a resilient pipeline especially in real estate, TMT, restructuring loans. Additionally, DBS’ North Asia operations (esp. Taiwan, China, HK) are rebounding following lockdowns in 1Q20. We believe DBS’ liquid balance sheet, especially for USD (78% LD ratio) provides opportunities for market share gains.
Management claims improved pricing power, even for large corporate customers while government risk sharing schemes should also provide higher return opportunities.

Allowances increased 14x y-o-y. 65% of this was general provisions with 1/3 driven by cautionary management overlay. SMEs, Aviation and Oil & Gas exposures need to be closely watched, although high levels of collaterals, existing provisions and government support programs should provide some relief.
Nevertheless, we expect credit charges to remain elevated upto 2023E and NPLs to rise to nearly 3% (vs.1.6% now) as the pandemic works its way through. We have raised 2020-2023E allowances by 9-28%.

We believe DBS may maintain its dividend at SGD1.32 in 2020E.
See DBS Share Price; DBS Target Price; DBS Analyst Reports; DBS Dividend History; DBS Announcements; DBS Latest News.
The upside to capital preservation from cancelling dividend at this stage is limited, in our view.
Management claims they are comfortable with raising payout to 70-80% (from 49% in 2019) to maintain dividends. Even at these level of payouts, plus higher credit charges and rising RWA from weaker asset quality, CET1 (13.9% 1Q20) should still be above the management comfort levels of 12.5% in the medium term, we estimate.

Thilan Wickramasinghe Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2020-04-30

SGX Stock Analyst Report BUY MAINTAIN BUY 22.10 UP 21.990