DBS GROUP HOLDINGS LTD (SGX:D05)
DBS Group - Decent Operating Performance
- DBS's 1H20 net profits of SGD2.4bn fell 26% from a year ago, with total allowances raised five-fold to SGD1.94bn to manage risks pre-emptively.
- DBS's 2Q dividends of 18 cents/share declared, for which a scrip dividend option will be issued at the average of closing prices on 14 and 17 August 2020.
- Elevated credit cost guidance is maintained for total allowances of SGD3-5bn over two years (of which SGD1.9bn has been taken in 1H20), further NIM compression ahead.
- Depressed valuations are reflecting lowered expectations and soft outlook ahead. Fair value is lifted to SGD22.50 implying 1.07x price/book (-1 s.d. to its 10Y historical average p/b).
Better than expected 1H20
- DBS (SGX:D05)'s 1H20 net profits of SGD2.4bn fell 26% y-o-y, as total allowances were raised five-fold to SGD1.94bn to strengthen the balance sheet for higher risks due to the pandemic. Total income gained 7% to SGD7.75bn, with stable expenses at SGD3.04bn. Fee income improved but remain below pre-Covid levels. Market conditions were beneficial for treasury markets income.
- Net interest income and fee income gained 1% y-o-y. 1H NIMs fell 16bps from a year ago to 1.74% (1Q NIM 1.86%, 2Q 1.62%). Lower NIMs however were mitigated by higher loan volumes (+3%, led by SG & HK non-trade corporate loans while trade and consumer loans declined), bringing 1H NII -2% h-o-h. Profit before allowances gained 12% to a new high of SGD4.7bn.
- DBS's capital continues to be healthy, with slight fall in CET1 ratio to 13.7%.
Lower dividends declared
- Lower dividends declared in line with MAS’s recent guidance (FY20 dividends to be capped at 60% of FY19 DPS) – DBS declared lower 2Q dividends of 18 cents/share following the recent MAS guidance, for which scrip dividend option (payable ~5 October 2020) will be issued at the average of closing prices on 14 and 17 August 2020.
Asset quality remains a concern, although 2Q has not seen much NPL formation and SP
- Management maintained prior guidance for total allowances of SGD3-5bn over two years (of which SGD1.9bn has been taken in 1H). 1H NPL ratio was stable at 1.5% due to limited NPL formation seen in 2Q (although this remains early days), vs 1.6% in March as most of the new NPA occurred in 1Q, which included a significant oil trader.
- NPA increased +10% in 1H. Reserves are now 24% above the minimum requirement from MAS. Allowance coverage was boosted to 106% or a higher coverage of 199% inclusive of collateral (valued at SGD2.97bn).
Conservative guidance ahead, some improvement in fee income streams since the trough in April as lockdowns eased
- NIMs should decline further in 2H20 although unrealized mark-to-market gains in investment securities and modest loans growth should mitigate some of the impact on NII. Full year FY20E NIM is expected to be around 1.6% (implying 2H20 NIMs will fall further towards ~1.5%), FY20E loans growth is projected at 5%.
- While 1H CIR improved and a review of costs is ongoing, full year guidance was maintained for 43%, implying an increase in 2H.
Recovery path will remain gradual.
- Recovery path will remain gradual, although concerns appear largely reflected in undemanding valuations. Fair value is raised to SGD22.50 - With depressed valuations reflecting lowered expectations for a weaker growth outlook and a prolonged recovery path from the pandemic, we raise our fair value to SGD22.50 which implies 1.07x price/book (-1 s.d. to its past 10-year historical average multiple).
- We expect continued NIMs pressure ahead as the lagged impact from the 1Q rate cuts passes through.
- See DBS Share Price; DBS Target Price; DBS Analyst Reports; DBS Dividend History; DBS Announcements; DBS Latest News.
- Upcoming quarters should continue to provide clarity on the unfolding impact of the viral outbreak on loans and asset quality while the bank build up provisions further.
OCBC Research Team
OCBC Investment Research
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https://www.iocbc.com/
2020-08-06
SGX Stock
Analyst Report
22.50
UP
20.000
