DBS Group - CGS-CIMB Research 2021-02-11: Brighter Days Ahead


DBS Group - Brighter Days Ahead

  • DBS's management adopted an optimistic tone, expecting stable NIMs, better fee income from stronger business momentum and lower impairments in FY21F.
  • Group loans under moratorium fell to 1% as at end-20 (from 5%). Provisions and opex for LVB manageable; should contribute positively in 12-24 months.
  • Reiterate ADD on DBS with target price of S$28.35. Clearer repayment trends post-moratorium give confidence that the worst of asset quality concerns are over.

Starting off the year with good business momentum in Jan 21

  • See DBS Group 4Q20 - CGS-CIMB Research 2021-02-10: Asset Quality Improving for highlights of DBS's 4Q20 earnings. DBS (SGX:D05)'s management adopted a more optimistic tone in its FY21F outlook; this stemmed from a visible rebound in business momentum across all operating markets into Jan 21, encouraging recovery of non-II towards pre-COVID-19 levels, and contained asset quality metrics.
  • DBS kept FY21F NIM guidance at 1.45-1.5% (FY20: 1.62%), benchmark rates stabilised, and pinned credit costs expectations at ~S$1bn in FY21F (group loans under moratorium decreased to ~1%).
  • Earnings upside could come from impairment writebacks (assuming a return to pre-COVID credit costs of ~S$700m-800m), but this would depend on sustained macroeconomic improvement, which we think is more likely from FY22F.

Investment income as a lever to offset NII weakness

  • On balance, DBS's FY20 total income performance was commendable given the severe economic slowdown and interest rate decline. Total income held steady y-o-y as the 6% y-o-y dip in NII was completely offset by realising significant gains on its investment securities.
  • Overall fee income was resilient (flattish y-o-y) as stronger wealth management (healthy customer risk appetite amid low yield environment) and brokerage fees compensated for weaker credit card and investment banking fees.
  • Contextually, further gains of investment securities would be opportunistic depending on yield curve movements. As such, we see non-II declining y-o-y in FY21F barring favourable market circumstances.
  • While we expect sequentially stable NIMs (4Q20 exit NIM: 1.48%), there may be headwinds from placing out excess funding into low-risk which drags on NIMs.

Credit costs and opex for LVB taken up front

  • Lakshmi Vilas Bank (LVB) added ~S$2.1bn in loans to DBS; this comprised S$212m in net NPAs which were fully secured. To sum up, the amalgamation of LVB necessitated S$183m in GPs and S$33m in restructuring costs.
  • Retail loans (mainly secured by gold) accounted for ~40% of total performing loans while SME/corporates made up the rest.
  • Further provisions or hefty opex are not expected for LVB, which is encouraging. Taking on LVB marks DBS’s transition from a digital-first strategy into a ‘phygital’ one.

Reiterate ADD on DBS with GGM-based target price of S$28.35

Andrea CHOONG CGS-CIMB Research | LIM Siew Khee CGS-CIMB Research | https://www.cgs-cimb.com 2021-02-11
SGX Stock Analyst Report ADD MAINTAIN ADD 28.350 SAME 28.350