DBS - CGS-CIMB Research 2020-11-07: Provisions Taken Up Front; Upgrade To ADD

DBS GROUP HOLDINGS LTD (SGX:D05)

DBS - Provisions Taken Up Front; Upgrade To ADD

DBS' management remains relatively cautious on asset quality improvement in FY21F, maintaining credit cost guidance at S$3bn-5bn over FY20-21F.
Corporate loans under moratorium rose slightly in 3Q20. DBS' aggressive 9M20 provisioning (c.50-83% of FY20-21 guidance) should cover potential NPLs.
Upgrade DBS to ADD with higher target price of S$25.51. Tapering impairments and a pick-up in fees should catalyse ROE recovery above c.10% in FY21F.

DBS (SGX:D05) maintains its credit cost guidance of S$3bn-5bn in FY20-21F as it errs on the side of conservatism.
In 3Q20, group loans under moratorium rose slightly to S$19.2bn (2Q20: S$18.3bn, 5% of group loans). The increase came from the corporate segment (70% of total), which were mostly secured. See result note: DBS & OCBC - CGS-CIMB Research 2020-11-05: Earnings Beat From Trading & Impairments.
Notably, DBS kept its impairment guidance due to difficulties in reasonably determining the probability of default at its exposures and consequently the rate of recovery given the challenging operating environment.
Separately, new NPA formation edged up to S$1.6bn in 9M20 (9M19: S$724m), pushing NPL ratio to 1.6% in 3Q20. Apart from a shipping exposure in 1Q20, the corporate stress in 3Q20 was spread across a handful of exposures – consumer goods exposure in China, and a state-owned-enterprise (SOE) in Indonesia, and an oil-related exposure in Hong Kong. These exposures were well-secured with minimal specific provisions required.
Having aggressively provisioned in 9M20 (c.50-83% of impairment guidance), we expect incremental credit costs to taper off as economic recovery picks up, and lower our DBS' FY21F credit cost estimate to c.28bp (FY20F: c.79bp).

Apart from continued downwards pressure on base rates, flush liquidity and DBS’s strategy to plough its excess funding into lower-risk placements with Monetary Authority of Singapore (MAS) had contributed to the sequential NIM decline in 3Q20.
Apart from these, credit spreads held up. DBS’s CASA base expanded S$70bn in 9M20, comprising mainly S$ and US$. Although risk-adjusted returns of these placements with MAS are attractive given the zero risk-weights, they will remain a drag on NIM due to the lower absolute returns.
Assuming a base case of benchmark rates having bottomed out, DBS expects NIM to stabilise at c.1.45-1.5% in FY21F; we expect 1.62% in FY20F.

We project DBS's fee income to be a key revenue driver in FY21F given the impending impact of lower NIM. In particular, we expect wealth management income to sustain, driven by expansion into the mass market and heightened interest from the western hemisphere. Tapering impairments should provide some room to maneuver revenue gaps.
We upgrade DBS to ADD, with a higher GGM-based target price of S$25.51 as we cut credit cost estimates, adjust NIMs and roll over to FY21F.
See DBS Share Price; DBS Target Price; DBS Analyst Reports; DBS Dividend History; DBS Announcements; DBS Latest News.
Management maintains that the scope for dividends to recover to pre-MAS cap levels remain intact, albeit not immediately upon the lifting of the restriction. We forecast dividend of c.S$1.08 for DBS in FY21F.

Andrea CHOONG CGS-CIMB Research | LIM Siew Khee CGS-CIMB Research | https://www.cgs-cimb.com 2020-11-07

SGX Stock Analyst Report ADD UPGRADE HOLD 25.51 UP 20.460