DBS - OCBC Investment 2020-11-05: Improving Business Momentum

DBS GROUP HOLDINGS LTD (SGX:D05)

DBS - Improving Business Momentum

DBS's 3Q20 net profit grew 4% q-o-q, driven by lower allowances and rebound in net fee income while net interest income declined as expected.
Conservative guidance is maintained for S$3-5bn of total allowances over two years.
Remain constructive over the medium term, fair value is raised to S$24.50 implying 1.2x price/book.

DBS (SGX:D05)'s 3Q20 net profit of S$1.3bn grew 4% q-o-q, helped by lower allowances taken (-35% q-o-q, S$554mn) following the bank’s front loading of provisions earlier in 1H. 3Q profit before allowances of S$2.038bn declined 9% q-o-q, weighed by lower net interest income and higher expenses (+4% q-o-q).
Net interest income declined 6% from previous quarter as NIM contracted 9bps, reflecting the fully impact of interest rate cuts in 1H. Fee income was solid, growing 17% driven by wealth management and card fees. Trading income moderated as expected from a high base. Cost-income ratio (CIR) rose 3% q-o-q to 43%, although 9M20 expenses remained lower 2% from a year ago (9M CIR ~40%, vs 42% in 9M19). Full year 2020 CIR guidance is maintained for 43%.
DBS's 3Q dividend of 18 cents per share was announced, similar to 2Q following regulatory guidance (FY20 dividends capped at 60% of FY19 DPS), bringing 9M dividend per share to 69 cents/share. DBS’s quarterly dividend cap will be in place until 1Q21. Balance sheet remains strong, with CET1 ratio of 13.9% as of end September (vs 13.7% as of June 2020).

For 9M20, DBS's net profit of S$3.709bn fell 24% y-o-y driven by accelerated build-up in allowances taken (~S$2.49bn).
9M20 ROE was ~9.7%. General allowances currently exceed the amount eligible for consideration as Tier-2 by about S$1.2bn. 9M20 operating profit of S$6.751 grew 5% y-o-y, with net interest income decline of 3% (NIM -23bps for 9M, offsetting 5% loan growth) while fee income is flat (weak 2Q offset by stronger 3Q). Year-to-date loans grew 3% (stable), with non-trade corporate loan drawdowns offset by repayments of short term facilities. Singapore residential loans moderated in 2Q due to the circuit breaker impact, but new bookings have rebounded in 3Q.
With continued moratorium support, 3Q and 9M20 NPL ratio remained low at ~1.6% with a slight uptick of 0.1% q-o-q and y-o-y. In terms of segments, consumer delinquencies declined with better collections, while there were some episodic corporate NPL formation. 3Q loan loss of S$554mn was lower from previous quarter (~59bps of average loans).

Loan moratoriums (~5.2% of total loans, S$19.2bn) picked up marginally for corporates in 3Q (S$13.5bn, vs 2Q’s S$12.6bn) which were largely secured, but was unchanged for consumers (S$5.7bn, most owner occupied residential loans in Singapore continue to have LTVs well below regulatory thresholds).

Amid the ongoing gradual economic recovery backdrop, management maintained conservative guidance in terms of provisioning, although amount in 2021 is expected to be lower than 2020. Overall non-performing assets formation is likely to trend higher as government relief programmes expire in 2021, and maintains its guidance for total allowances of S$3-5bn over two years (of which S$2.5bn has already been taken).
Management expects 2020 cost-income ratio of 43%, and 2021 expenses to be largely similar y-o-y. Loans are forecast to grow a mid-single digit in 2021, which could have upside risks should the recovery gain momentum.
On a positive note, DBS expects to achieve double digit fee income growth next year, which should help to mitigagte the full year impact of lower NIM.

Lifting our fair value to S$24.50 implying 1.2x price/book (in line with its past 10Y historical average multiple) and estimates to reflect an improved outlook next year. DBS has delivered +11% total returns since our last upgrade to Buy in early August, reflecting improved sentiment from the gradual resumption in economic activities. We maintain our constructive outlook for patient investors, and continue to see support from undemanding valuations and modest expectations.
The accelerated front loading of provisions taken in 1H20 (~S$2.5bn, vs S$3-5bn range over two years guided) helps to provide some comfort although asset quality trends remain an area to monitor next year as we approach the expiry of government support schemes while NIM should remain subdued in a prolonged low interest rate environment.
Upcoming quarters should continue to provide clarity on the unfolding impact of the viral outbreak on loans and asset quality while the bank continues to add further to provisions.
See DBS Share Price; DBS Target Price; DBS Analyst Reports; DBS Dividend History; DBS Announcements; DBS Latest News.

OCBC Research Team OCBC Investment Research | https://www.iocbc.com/ 2020-11-05

SGX Stock Analyst Report BUY MAINTAIN BUY 24.50 UP 22.500