DBS GROUP HOLDINGS LTD (SGX:D05)
DBS Group - 2Q20 NIM Compression Severe, Asset Quality Benign
- DBS surpassed expectations with a vast improvement in CASA ratio and continued expansion of AUM. It fortified its balance sheet by increasing general provisions 51% h-o-h to S$3.8b, which is 24% above MAS’ minimum requirement. Loan-loss coverage has improved 21.3ppt h-o-h to 105.4%.
- Management expects fee income to recover as the lockdown eases in 2H20. Unrealised MTM gains of S$1.5b in its book could provide a cushion against lower NIM in 2H20.
- Maintain BUY. Target price: S$22.90.
DBS's 2Q20 Results
- DBS (SGX:D05) reported net profit of S$1,247m for 2Q20 (down 22% y-o-y but up 7% q-o-q), above our expectations of S$1,079m. The outperformance arose mainly from realised gains from fixed income securities due to lower interest rates of S$663m in 1H20.
Deposits franchise strengthened by transaction banking.
- Deposits expanded by 14.3% y-o-y, outpacing loan growth at 7.2% y-o-y. Thus, loans-to-deposit ratio narrowed by 6ppt y-o-y to 84%. On a group-wide basis, CASA ratio improved 7.5ppt y-o-y to 66.2%. Low-cost current accounts and savings accounts expanded 54% and 16% y-o-y respectively, but high-cost fixed deposits contracted by 7% y-o-y.
- Non-trade corporate loans expanded by S$20b in 1H20 (drawdowns in Singapore and Hong Kong), offset by contraction of S$5b for trade loans and S$3b for consumer loans (less borrowings from wealth management customers).
NIM compression exacerbated by surplus deposits.
- NIM compressed 29bp y-o-y and 24bp q-o-q to 1.62% in 2Q20 due to lower interest rates and the deployment of excess deposits into the interbank market. Management highlighted that surplus deposits caused a 6bp drag on NIM. Net interest income swung from an increase of 7% y-o-y in 1Q20 to a drop of 5% y-o-y in 2Q20.
Fees affected by broad-based slowdown in economic activities.
- Fee income fell 11% y-o-y in 2Q20 as lockdowns affected economic activities across the region. Wealth management fees fell 8% y-o-y due to lower bancassurance sales. AUM expanded 7% y-o-y to S$251m. Contribution from cards contracted 34% y-o-y due to curbs on overseas travel. Loans related fees increased 2% y-o-y due to higher volume of transactions.
Asset quality benign.
- NPL formation was benign at S$115m in 2Q20 (1Q20: S$1,023m). NPL balance increased by 6.5% h-o-h in 1H20, moderated by write-offs and recoveries. NPL ratio was almost unchanged at 1.51%.
Fortifying balance sheet against COVID-19 pandemic.
- DBS continued to put in huge provisions of S$849m in 2Q20 (credit cost: 90bp). Specific provisions were lower at S$173m (1Q20: S$383m due to Hin Leong). General provisions remained elevated at S$560m (1Q20: S$703m). Cumulative general provisions increased 51% h-o-h to S$3.8b and are 24% above MAS’ minimum requirement. Loan-loss coverage improved 21.3ppt h-o-h to 105.4%.
- DBS has declared a quarterly dividend of 18 S cents for 2Q20, for which scrip dividend scheme is applicable).
STOCK IMPACT
Guidance for 2020.
- DBS expects loan growth of 5% driven by non-trade corporate loans in 2020. Total income is expected to be flat compared to last year. NIM is expected to be 1.60% for the full year. Management guided stable cost/income ratio at 43%. Management maintained its guidance on credit costs at S$3b-5b (80-130bp) cumulatively over two years.
Recovery in fee income.
- Management foresee fee income streams to improve after hitting trough in April as the lockdown eases. Wealth management fees have recovered to pre-COVID-19 record levels. Contributions from cards and bancassurance have rebounded in June but remain below pre-COVID-19 levels.
- DBS has unrealised mark-to-market (MTM) gains of S$1.5b in its book to provide a cushion against lower NIM in 2H20.
Supporting customers through tough times.
- DBS has provided relief measures totalling S$18.3b across key markets:
- S$12.6b in corporate loans, mainly secured SME loans in Singapore and Hong Kong, and
- S$5.7b in consumer loans, mainly owner-occupied Singapore housing loans with low LTV of 55%.
- Management has approved S$4b of government-assisted loan scheme where the government’s risk share is 90%. So far, customers have drawn down S$2.5b.
EARNINGS REVISION/RISK
- We raise our 2020 net profit forecast by 1.2% due to the better-than-anticipated 2Q20 results. We cut our 2021 net profit forecast by 3.8% due to further NIM compression of 14bp to 1.47%.
VALUATION/RECOMMENDATION
Maintain BUY.
- Our target price of S$22.90 is based on 1.07x 2021F P/B, derived from Gordon Growth model (ROE: 8.2%, COE: 7.75% (beta: 1.15x), Growth: 1.5%).
- See DBS Share Price; DBS Target Price; DBS Analyst Reports; DBS Dividend History; DBS Announcements; DBS Latest News.
Jonathan KOH CFA
UOB Kay Hian Research
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https://research.uobkayhian.com/
2020-08-07
SGX Stock
Analyst Report
22.90
DOWN
23.120
