DBS Group - RHB Invest 2020-11-06: Well-Provisioned For ROE Recovery; Upgrade To BUY


DBS Group - Well-Provisioned For ROE Recovery; Upgrade To BUY

  • Strong recovery in fee income and lower impairment charges led to DBS's better-than-expected 3Q20 results. With FY20F provisions expected to reach the lower end of management’s 2-year guidance, we believe DBS should be on track to a sustained ROE recovery in FY21F-22F. CET-1, being at a comfortable 13.7%, should safeguard dividend prospects.
  • Upgrade DBS to BUY from Neutral, new S$25.20 target price from S$18.50, 12% upside with c.3% FY20F yield.

DBS' 9M20 earnings a beat.

  • DBS (SGX:D05) reported net profit of S$1,297m (+4% q-o-q; -20% y-o-y) for 3Q20, and S$3,709m for 9M20 (-24% y-o-y). 9M20 earnings are above our and consensus expectations, at 83% of FY20 forecasts.
  • Reported 9M20 ROAE was at 9.7%. An interim dividend of S$0.18 per share was declared, for which the scrip dividend scheme will apply.

3Q20 PIOP down 9% q-o-q

  • 3Q20 PIOP down 9% q-o-q as topline fell 4% q-o-q and opex rose 4% q-o-q. Net fee income rose 17% q-o-q, led by wealth management (+25%) and card (+22%) fees as lockdown measures eased and economic activities resumed.
  • Still, NIM slippage (-9bps q-o-q) on flattish loans and lower trading income from the higher base in 2Q20 resulted in the lower operating income.
  • Opex was up 4% q-o-q on COVID-19 related support for staff and non-recurring occupancy costs. Net profit was lifted by the 35% q-o-q reduction in impairment charges, which lowered credit cost to 58bps (2Q20: 90bps).

Asset quality stable, no change to guidance on provisions.

  • DBS's non-performing assets (NPA) rose 3% q-o-q on a few episodic corporate accounts while new NPA formation was moderated by repayments and write-offs. NPL ratio rose to 1.6% (2Q20: 1.5%). Management expects NPAs to rise further in 2021 after loan moratoriums end.
  • Leanings towards the conservative, DBS is maintaining its FY20-21F provisions guidance at S$3-5bn.

NIM pressure to persist, fee momentum improving.

  • Against the backdrop of improving economic prospects in North Asia, management expects the loan growth momentum to continue into 2021, and is targeting mid-single digit loan growth. NIM will, however, continue to see headwinds.
  • Although interest rates are not expected to decrease, asset yields should tighten on the continued downward re-pricing of the bank’s loan book. Management expects NIM to ease to 1.4-1.5%, vs 1.53% in 3Q20.

Fee income a bright spot.

  • Management is upbeat on the sustained recovery in fee income. The low interest environment is spurring demand for wealth management products. This, coupled with stronger customer treasury flows, point to double-digit fee income growth in FY21F.

DBS - Earnings and target price.

Singapore Research RHB Securities Research | https://www.rhbinvest.com.sg/ 2020-11-06
SGX Stock Analyst Report BUY UPGRADE NEUTRAL 25.20 UP 18.500