DBS Group - UOB Kay Hian 2020-11-06: 3Q20 Credit Costs Have Peaked And Are Trending Lower

DBS GROUP HOLDINGS LTD (SGX:D05)

DBS - 3Q20 Credit Costs Have Peaked And Are Trending Lower

DBS conservatively set aside general provisions of S$1.5b in 9M20 to fortify its balance sheet against the potential fallout from the COVID-19 pandemic. General provisions reserve increased 60% year-to-date to S$4,017m, which exceeded MAS’ minimum requirement by 32%.
We raised our DBS' net profit forecast for 2021 by 10% due to lower credit costs of 42.6bp (previous: 55.9bp). We expect DBS' dividend yield to improve from 4.8% in 2021 to 5.9% in 2022.

DBS (SGX:D05) reported net profit of S$1,297m for 3Q20, down 20% y-o-y but up 4% q-o-q. The results were above our expectations of S$1,106m.

Loans expanded 5% y-o-y but contracted 1% q-o-q with the drawdown of non-trade corporate loans offset by repayment of short-term facilities in 1H20. NIM narrowed 37bp y-o-y and 9bp q-o-q to 1.53% due to global interest rate cuts in March. Thus, net interest income dropped 11.8% y-o-y.

Deposits expanded by 11.7% y-o-y, outpacing loan growth at 5.1% y-o-y. Thus, loans/deposits ratio narrowed by 5.2ppt y-o-y to 83.1%. On a group-wide basis, current and savings account (CASA) ratio improved by another 3.3ppt q-o-q to 69.5%. Low-cost current accounts and savings accounts expanded 30% or S$72b in 9M20, but high-cost fixed deposits contracted by 18% year-to-date.

Fees rebounded 17% q-o-q, driven by wealth management (+25% q-o-q) and cards (+22% q-o-q). DBS benefitted from improved market sentiment and growth in sale for investment and insurance products and recovery in consumer spending post-Circuit Breaker.
DBS' other non-interest income increased 11% y-o-y.

Total provisions dropped 35% q-o-q to S$554m. Credit costs receded from 90bp in 2Q20 to 59bp in 3Q20. DBS has recognised total provisions of S$2.5b in 9M20, of which three-fifths were general provisions conservatively set aside to fortify its balance sheet against potential fallout from the COVID-19 pandemic.
DBS' general provisions reserve increased 60% to S$4,017m in 9M20, which exceeded MAS' minimum requirement by 32% and serve as a buffer against unforeseen credit deterioration.
NPL formation of S$543m was due to consumer companies in Greater China, shipping company (oil bunkering) in Singapore and state-owned company in Indonesia. NPL ratio inched marginally higher by 0.1ppt q-o-q to 1.6%.
DBS declared quarterly dividend of 18 cents (scrip dividend scheme is applicable).

DBS' management guided on mid-single-digit loan growth and double-digit fee income growth for 2021. NIM is expected to further moderate to 1.45-1.50%. Management expects operating expenses to hold flat at 2019 level with cost/income ratio at 43% during 2021.

Loan moratoriums for corporate customers, including SMEs, increased slightly from S$12.6b to S$13.5b. Loan moratoriums for consumers remain unchanged at S$5.7b, mostly owner-occupied Singapore housing loans.

NPL formation is expected to trend upwards as government relief programmes end in 2021. DBS sees episodic corporate NPL formation but consumer delinquencies are expected to decline with improved collection. DBS' management has maintained guidance for total provisions at S$3b-5b cumulatively for two years in 2020 and 2021.
Given that DBS has fortified its balance sheet by recognising more provisions upfront in 2020 (S$2.5b taken in 9M20), provisions are expected to be lower in 2021.

Jonathan KOH CFA UOB Kay Hian Research | https://research.uobkayhian.com/ 2020-11-06

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