DBS Group - Phillip Securities 2020-05-04: Allowances Dent Record Operating Result

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

DBS Group - Allowances Dent Record Operating Result

  • DBS (SGX:D05)'s 1Q20 earnings of $1.17bn missed original estimates of $1.59bn. However, pre-provision operating profit (PPOP) of $2.47bn was 15% higher than previous estimates.
  • $1.09bn of allowances was undertaken to build-up capital buffer from the impact of COVID-19. Two-thirds were booked as GP while the remainder was from SP.
  • DBS expects credit costs to increase by $3bn-5bn (80-130 bps) cumulatively over the next two years as a result of the COVID-19 pandemic.
  • 1Q20 interim dividend at S$0.33 per share was maintained from the previous quarter. We expect annual dividends of S$1.32, a yield of 6.4% for DBS based on our Target Price.
  • Maintain ACCUMULATE with a downward revision in Target Price to S$20.60. Our FY20e earnings estimate was revised downwards by 33% after raising provision by $700mn per quarter over the next 5 quarters and compressing NIM by 10 bps.



The Positives


Record PPOP of $2.48bn provides buffer amidst trying operating environment.

  • Total income crossed record $4bn mark (+13.4% y-o-y) as cost discipline was maintained (+3.9% y-o-y) to provide a positive JAW of 9%. CIR improved to 38.6% in 1Q20 (1Q20: 42.2%).
  • Income was buoyed by robust growth across all segments. In particular non-interest income benefitted the most (+39.3% y-o-y) as investment gains were realised on fixed income assets during the quarter.
  • Fee income enjoyed strong growth (+14% y-o-y) from WM fees (+28% y-o-y), loan-related fees (+17% y-o-y) as well as investment banking fees (+64% y-o-y).
  • NII grew 7.4% y-o-y on relatively stable NIM (1Q20: 1.86% vs. 1Q19: 1.88%) and loans growth of 4% y-o-y as translation effect of interest rate cuts on NIM was muted in the first quarter.
  • Strong operating results in 1Q20 is expected to hold up FY20 income levels similar to FY19 levels as business slows in subsequent quarters. This means the bank expects income gain of $500mn in 1Q20 y-o-y to be offset by lower income across the subsequent three quarters of FY20.

Interim quarterly dividends maintained at of 33 cents

  • Interim quarterly dividends maintained at of 33 cents, providing an annualised yield of 6.6%. The bank expects current levels of dividend to be sustainable unless CET-1 levels fall drastically below the targeted operating range of 12.5 – 13.5%.
  • Current CET-1 level maintains at 13.9%, little changed from a year ago (1Q19: 14.1%). DBS added that dividend is guided by stability rather than a targeted payout ratio. See DBS Dividend History.




The Negatives


Allowances put a huge dent on earnings.

  • In anticipation of the impact from the pandemic, DBS has set aside $1.09bn in 1Q20 as allowances. Of which, $706mn was booked as GP as economic conditions continue deteriorating. This was a stark contrast from a year ago, when DBS wrote-back $100mn in GP on upgrades and recoveries. The remaining amount was charged to SP, largely attributed to new account in the O&G sector identified in the quarter. We believe around S$200mn (or “more than half”) of specific allowances were made on a notable oil trader.
  • Exposure to the O&G sector maintained at $23bn, roughly 6% of loan book. However, exposure to traders within the sector, who are at risk from the oil price crisis stands at $5bn, lower than 2% of overall loan exposure.


Outlook


Downward NIM pressure to kick in in subsequent quarters.

  • Resilience in NIM in 1Q20 was not reflective of NIM pressure ahead as LIBOR held up due to stressed funding conditions. We have reduced FY20 NIM forecast by 10 bps to incorporate the lower interest rate cuts environment. Conversely, DBS mentioned there is pricing power by increasing spreads especially when competing banks start to withdraw their loans.

Credit costs to increase by 80-130 bps cumulatively over the next 2 years

  • Credit costs to increase by 80-130 bps cumulatively over the next 2 years, amounting to $3bn-5bn in additional allowances to be booked. We have included an additional $3bn on top of the $1.09 booked in 1Q20 in our estimates, putting allowance at around $700mn per quarter for the next 4 quarters.

Sufficient capital to ride through this downturn.

  • CET1 is 13.9% Currently, cumulative GP stands at $3.2bn, including management overlays of around $1bn. The bank’s various capital and liquidity positions also maintain well above regulatory requirements. For more information, please refer to Annex A in attached PDF report.


Investment Actions


We maintain our ACCUMULATE recommendation with a lowered Target Price of S$20.60 (previously $27.30).






Tay Wee Kuang Phillip Securities Research | https://www.stocksbnb.com/ 2020-05-04
SGX Stock Analyst Report ACCUMULATE MAINTAIN ACCUMULATE 20.60 DOWN 27.300



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