DBS - RHB Invest 2020-08-07: Provisions To Stay High As Non-Performing Loans Rise

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DBS GROUP HOLDINGS LTD (SGX:D05)

DBS - Provisions To Stay High As Non-Performing Loans Rise

• DBS’ 1H20 net profit accounts for 51% and 53% of our pre-results and consensus’ FY20F. Given the asset quality uncertainties ahead, there are risks of provisioning being even higher than our revised forecasts.
• Keep NEUTRAL, new GGM-derived SGD18.50 Target Price from SGD18.70, 9% downside, offset by c.4% yield, based on 0.94x 2020F P/NBV, which is derived from our sustainable ROE assumption of 9.3% vs 1H20’s 9.5%.

DBS' 1H20 net profit fell 26% y-o-y, and we expect weak earnings ahead.

• DBS (SGX:D05)'s 1H20 total income rose 7% y-o-y, driven mainly by other non-interest income. 1H20 NII was up 1% y-o-y, but weakness was evident in 2Q20, with NII down 7% q-o-q.
• We cut our FY20F NII by 2%, due to lower NIM assumption. Consequently, FY20F net profit was lowered by 5%.

Sharp NIM compression.

• DBS' 2Q20 NIM of 1.62% was 24bps narrower q-o-q. There were sharp cuts in interest rates globally, and DBS deployed excess deposits into lower-yielding assets. Management guided FY20 NIM to be 1.6%, and we forecast a close 1.63% (cut from 1.75%). We assume FY20 loan growth of 5%.

DBS guided for allowances of SGD3-5bn cumulatively over two years.

• NPL ratio was 1.5%, slightly lower than 1Q20‘s 1.6%. DBS said there were not much NPL formation and specific provisions in 2Q20, other than for unsecured consumer credit. The relief measures – which include SGD12.6bn in corporate loans on principal-only moratoriums, and SGD5.7bn in consumer loans (mostly owner-occupied Singapore housing loans) – have helped.
• We forecast cumulative 2-year provisions of SGD4.9bn, with the bulk incurred in FY20, on the back of rising NPL ratio to FY21F’s 2.6%.

Capital remains adequate.

• The bank’s CET1 CAR of 13.7% is lower than FY19’s 14.1%, due to an increase in risk-weighted assets, but remains sufficient.
• DBS declared a 2Q20 dividend of SGD0.18 per share – the scrip dividend scheme will apply, with no discount. The lower dividend is in accordance with Monetary Authority of Singapore’s guidance to moderate banks’ 2020 dividends. We forecast FY20 DPS at SGD0.87. In the absence of regulatory guidelines, we assume a FY21F dividend of SGD1.00 per share.
• See DBS Share Price; DBS Target Price; DBS Analyst Reports; DBS Dividend History; DBS Announcements; DBS Latest News.
• We have a target 2020F P/NBV of 0.94x, which is at c.1SD below the 5-year average of 1.18x. Uncertainties make it unlikely for DBS to revert to its historical average P/NBV in the near term.
• See also report: United Overseas Bank - RHB Invest 2020-08-06: NIM Squeeze On Interest Rates Fall.

Leng Seng Choon CFA RHB Securities Research | https://www.rhbinvest.com.sg/ 2020-08-07

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