DBS Group - Phillip Securities 2020-08-11: Non-Interest Income Provides Relief To Short-Term Woes

DBS GROUP HOLDINGS LTD (SGX:D05)

DBS Group - Non-Interest Income Provides Relief To Short-Term Woes

DBS (SGX:D05) reported 2Q20 earnings of S$1.25bn was higher 21% than previous estimate of S$1.03bn. The 22% decline in earnings y-o-y was a result of lower NII and higher provisions due to the poor economic outlook amidst COVID-19.
NII fell 5% y-o-y in 2Q20 from a 29 bps fall in NIM from 2Q19 (1.91%) partially offset by loans growth of 7% y-o-y.
Other non-interest income increased 45% y-o-y on gains from investment holdings.
DBS continues to shore up allowances, adding S$560mn in GP to bring total GP buffer up from S$2.5bn a year ago to S$3.8bn.

Announced quarterly dividend of S$0.18 per share, which will be capped at the same level for the next 1 year as stipulated by MAS.
Maintain ACCUMULATE with a upward revision in Target Price to S$21.00 (previously S$20.60). We revise 2H20 earnings upwards by 5% with resilience from expected strength in non-interest income.

Other non-interest income jumped 45% y-o-y in 2Q20 due to profit realisation from fixed income securities. This contributed to a 3.6x jump in net income from investment securities in 1H20 to S$663mn from S$184mn in 1H19.
The bank has noted that it is currently holding S$1.5bn of unrealised mark-to-market gains in investment securities. This may allow the bank to provide income buffer against the weakness observed across other income sources.

The quarter saw full impact of the double interest rate cuts in March. However, loans growth of 7% y-o-y muted the impact of NIM compression on NII. NIM for 1H20 was held up by a resilient 1Q20, coming in at 1.74%, 16 bps lower than 1H19 of 1.90%.
With asset pricing adjustments lagging loans pricing, we expect NIM to stabilise at current levels, which will see NIM coming in at 1.68% for the entire FY20.

However, 1H20 fee income came relatively stable (+1%) at S$1.75bn from 1H19 as fee income from 1Q20 was up 14% y-o-y. Brokerage fees were up 25% y-o-y from S$59mn in 1H19 to $74mn in 1H20, but was offset by lower investment banking fee and credit card fees of S$63mn (-19%) and S$304mn (-21%) respectively from S$78mn and S$387mn in 1H19.
Business momentum should return gradually as economic activities resume, with wealth management fee looking to benefit with face-to-face interactions between the bank and its customers.

Under MAS guidance to cap dividends for FY20, dividends will be capped at S$0.18 for the next 4 quarters to 1Q20, bringing FY20e distribution to $0.87, down 30% from FY19 distribution of $1.23. We expect dividends to go back to previous levels of S$0.33 per quarter by 3Q21, which will bring FY21 distribution to S$1.02. See DBS Dividend History.
Option for scrip dividend will be available through the next four quarters but without any discount as the bank sees no need to further conserve capital.

For 1Q20, DBS has set aside an additional S$560mn in GP allowances, bringing YTD GP allowances to S$1.26bn. This is in line with management guidance of 80 – 130 bps in credit costs amounting to S$3 - 5bn to be booked by end of FY21.
We expect book-building to occur and similar rate for the next 2 quarters and taper slightly to S$0.5bn per quarter in FY21.

We maintain our ACCUMULATE recommendation with a revised Target Price of S$21.00 (previously S$20.60). We have revised income upwards with resilience observed from non-interest income providing buffer to weakness from NII. CET-1 ratio for DBS remains healthy at 13.7% in 2Q20 compared to 13.6% a year ago.
See DBS Share Price; DBS Target Price; DBS Analyst Reports; DBS Dividend History; DBS Announcements; DBS Latest News.

Tay Wee Kuang Phillip Securities Research | https://www.stocksbnb.com/ 2020-08-11

SGX Stock Analyst Report ACCUMULATE UPGRADE NEUTRAL 21.00 UP 20.600