DBS Group - CGS-CIMB Research 2020-08-10: Holding Firm On Impairment Guidance

DBS GROUP HOLDINGS LTD (SGX:D05)

DBS Group - Holding Firm On Impairment Guidance

DBS (SGX:D05)'s Credit cost guidance maintained at S$3bn-5bn (1H20: S$1.9bn) in FY20-21F. Incremental asset quality strains (outside unsecured retail) remain at bay.
We expect sequential NIM compression in 2H20 at a smaller q-o-q quantum as benchmark rates bottom. We expect NIM to dip 29bp y-o-y to 1.60% in FY20F.
Superior trading and investment gains indicate DBS’s strength in managing treasury book. DBS share price performance may be capped by lower 4% yield.

Reiterate HOLD on DBS. Target Price is raised to S$20.46 as we adjust sectoral risk-free rate.

2Q20 NIMs reflected the brunt of the multiple Fed rate cuts in Mar 20. A combination of significantly lower benchmark rates and deliberate action to deploy funds into lower-risk assets ultimately lowered DBS’s NIMs 24bp q-o-q to 1.62%. Placements of an excess c.S$20bn in CASA deposits with the central bank contributed 6bp of the NIM decline, an ROE-accretive move as placements to the central bank carry zero risk-weights.
DBS guides for FY20F NIM to tumble further towards c.1.6%.

Strong treasury income from interest rate, FX and equity products were the saviour of overall weaker fee income as customer activity shrank due to pandemic-driven lockdowns.
On credit card fees, the bank notes the beginnings of a rebound in transaction volumes, although these are still about 20-25% below pre-COVID-19 levels. Wealth income was weaker q-o-q due to lower bancassurance momentum and customers exiting their positions.
Going forward, DBS could utilise its unrealised MTM gains (c.S$1.5bn) reserve to cushion lower NIMs, although it then becomes a tactical call between realising the gains or churning NII (and consequently NIM) from these higher-yielding assets.
DBS guides for total income to stay flattish y-o-y in FY20F.

At this stage, asset quality trends remain in line with the banks’ expectations; management does not foresee incremental credit costs above the S$3bn-5bn (80-130bp) guidance for FY20-21F. 1H20 provisions came up to a collective S$1.9bn. Other than sustained asset quality pressure from unsecured consumer exposures, delinquencies in other portfolios remain contained.
Loans under moratorium amounted to c.5% of total loans, although DBS is cognisant that NPLs from SMEs may pick up as the scheme runs off.
DBS set aside 76bp credit costs in 2Q20 (1Q20: 99bp) as it front-loaded its general provisions via macro overlays; SPs were only 26bp (1Q20: 35bp).

We adjust FY20F earnings to reflect the NIM decline, although this is partially offset by stronger treasury gains. Our GGM-based Target Price is raised as we adjust sector risk-free rate. DBS believes in its capacity to hold DPS steady if not for MAS’s call for lower dividends.
We cut DBS's FY20F DPS to S$0.87, but still hope for a dividend recovery come FY21F.
See DBS Share Price; DBS Target Price; DBS Analyst Reports; DBS Dividend History; DBS Announcements; DBS Latest News.

Upside risks include a swift rebound in regional economic activity as country borders reopen.
Downside risks are a second wave of Covid-19 infections in Singapore banks’ operating economies, hampering customer activity and investment sentiment.

Andrea CHOONG CGS-CIMB Research | LIM Siew Khee CGS-CIMB Research | https://www.cgs-cimb.com 2020-08-10

SGX Stock Analyst Report HOLD MAINTAIN HOLD 20.46 UP 18.800