DBS GROUP HOLDINGS LTD (SGX:D05)
DBS Group 1Q20 - New Guidance In Line With Our Expectations
- Operationally, DBS exceeded expectations by maintaining NIM at 1.86% and generating strong growth in fees (+14% y-o-y) and other non-interest income (+39% y-o-y). DBS expects full-year PPOP to be around 2019’s level. It expects credit costs to rise to between S$3b-5b (80-130bp) cumulatively over two years, about 65bp for 2020 and 2021.
- We maintain our earnings forecast as management guidance is in line with our expectations. Maintain BUY.
- Target price: S$22.30.
DBS' 1Q20 Results
- DBS (SGX:D05) reported 1Q20 net profit of S$1,165m (-29% y-o-y), in line with our forecast of S$1,142m.
Net interest income grew 7% y-o-y.
- Loans expanded 1% q-o-q with non-trade corporate loans rising 5% q-o-q, offset by contraction for trade loans and wealth management loans. NIM was sequentially flat at 1.86%.
Non-interest income exceeded expectations.
- Fees grew 14% y-o-y driven by wealth management (+14% y-o-y) and loans-related fees (+17% y-o-y). Other non-interest income grew by a hefty 39% y-o-y.
- Net trading income was robust due to increased customer flows from hedging of interest rates and forex risks as a result of heightened uncertainties.
- DBS also recognised gains from investment securities.
Exercise discipline to control costs.
- Operating expenses declined 3% q-o-q due to lower staff costs and general expenses. Cost-to-income dropped to 38.6% (1Q19: 42.2%). Pre-provisions operating profit (PPOP) increased 20.3% y-o-y.
Addressing the impact of COVID-19 pandemic.
- DBS recognised S$1,023m of new NPLs (we expect exposure to oil trader Hin Leong of US$290m or S$415m (0.11% of total loans), which was already recognised as NPL in 1Q20). Thus, NPL ratio deteriorated from 1.5% to 1.6%. DBS set aside general provisions of S$703m to address risks arising from the COVID-19 pandemic. Specific provision of S$383m for new exposures was recognised as non-performing during the quarter.
- Total credit cost was 119bp in 1Q20 (FY19: 18bp).
Maintains stable dividend.
- DBS has declared quarterly dividend at 33 S cents (unchanged) for 1Q20. Its scrip dividend scheme is not applicable for the quarterly dividend.
DBS' Guidance for 2020.
- DBS expects full-year PPOP to be around 2019’s level after factoring in declines for the rest of the year. It expects credit costs to rise to between S$3b-5b (80- 130bp) cumulatively over two years. Management guided credit costs at 65bp for 2020 and 2021. The new guidance factors in a deeper and more prolonged economic impact from COVID-19 pandemic. This is in line with our expectations.
Impact of lower interest rate to be felt in 2Q20.
- LIBOR interbank rates were resilient due to stressed funding market conditions. Funding market conditions are expected to improve, resulting in lower LIBOR. Exit NIM was 1.70% in Mar 20.
DBS' COVID-19 support measures.
- DBS has provided loan moratorium for 1,800 corporate facilities, representing loans outstanding of S$3.4b. It has provided loan facilities of S$3.2b under the government relief programme. It has processed 8,000 applications for deferral of principal and interest payments for residential mortgages, representing loans outstanding of S$4.7b.
DBS' Exposure to SMEs.
- DBS disclosed that SME loan size is S$39b (10% of loan book). 90% of its SME exposures are in Singapore and Hong Kong and they are predominantly secured against property. DBS has tightened lending criteria for SME loans over the past two years. Highly impacted industries, such as hotels, F&B and retailers, accounted for 10% of SME loans.
- Loan size for unsecured personal credit is only S$11b, or 3% of total loans.
DBS' Exposure to O&G.
- DBS has increased its exposure to the Oil & Gas (O&G) sector, such as Producers (from S$5b at end-16 to S$7b at Mar 20), Processors (S$4b to S$7b) and Traders (S$2b to S$5b). Downstream (refining) loans are mainly to oil majors, leading refiners, or integrated operators with diversified income.
- For Traders, one loan (Hin Leong) had already been recognised as NPL during 1Q20. Borrowers are global traders or state-owned companies. Otherwise, loans are tightly structured and secured.
Maintain BUY.
- See DBS Share Price; DBS Target Price; DBS Analyst Reports; DBS Dividend History; DBS Announcements; DBS Latest News.
- Our existing earnings forecast for DBS is relatively unchanged.
- Our target price of S$22.30 is based on 1.13x 2020F P/B, derived from Gordon Growth model (ROE: 9.1%, COE: 8.0% (beta: 1.2x), Growth: 0.0%).
- DBS is also one of UOBKH's Singapore Stock Alpha Picks for May 2020.
Jonathan KOH CFA
UOB Kay Hian Research
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https://research.uobkayhian.com/
2020-05-04
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