DBS Group - OCBC Investment 2021-02-10: Upbeat Outlook


DBS Group - Upbeat Outlook

  • DBS (SGX:D05)'s FY20 earnings of S$4.72bn fell 26% from a year ago, closing a soft year due to the pandemic.
  • Provision guidance is improved to “middle of S$3-5bn” range for FY20-21E. DBS's management also provided an upbeat update on its business pipeline and growth momentum at the start of 2021.
  • Fair value for DBS is raised to S$29.50 implying 1.47x price/book and 12.9x FY21E PER, and reflecting a firmer recovery outlook ahead with double-digit fee income growth expected while the bulk of NIM pressure looks largely played out.

Some recovery in business momentum was observed in 4Q20

  • Some recovery in business momentum was observed in 4Q, with brighter spots from resilient fee income and broad based loans growth across non-trade corporate, housing and wealth management segments.
  • DBS's 4Q20 net profit of S$1.012bn declined 22% q-o-q and 33% y-o-y. Total income of S$3.263bn fell 9% q-o-q on the back continued loans repricing amid a low rate environment, seasonally lower fee income and lower gains from investment securities.
  • 4Q20 saw pressure on NIM (-4bps, exit NIM ~1.48%) and net interest income (-2% q-o-q) as expected, although loans were up 1% q-o-q supported by growth in consumer and non-trade corporate loans, and loans from Lakshimi Vilas Bank (LVB). Housing loans in Singapore grew following solid bookings in 3Q. Overall loans were up 4% for the full year, driven by non-trade corporate loan growth.
  • Allowances buildup moderated last quarter as expected, with S$577mn booked (+4% q-o-q, 4Q20 credit costs ~62bps of average loans) as full year total allowances reached SDG3bn. DBS's 4Q20 new NPA formation was in line with recent average run rate, with 4Q20 NPL ratio stable q-o-q at 1.6%.

FY20 earnings of S$4.72bn fell 26% from a year ago

  • Profit before allowances gained 2% to a new high of S$8.43bn. Total allowances of S$3.07bn were quadrupled with general allowances of S$1.71bn set aside. Total income of S$14.6bn was stable, with net interest income decline of 6% (~27bps NIM decline, mitigated by 4% loan growth) and stable fee income of S$3.06bn despite a difficult environment last year. Expenses were well managed (-2%) resulting in one percentage point pick up in the bank’s cost income ratio to 42%.
  • DBS's full year NPL ratio of 1.6% increased slightly from FY19’s 1.5%. 4Q dividend of S$0.18 per share was declared, bringing DBS's full year FY20 dividend to S$0.87 per share.
  • In terms of business segments, consumer banking total income of S$5.77bn fell 8% y-o-y, with weaker income from lower deposit margin and car fees partially offset by higher investment product income and loan margins, while wealth management assets under management grew 7% to S$264bn.
  • Market share for S$ savings deposits and SG housing loans were 52% and 31% respectively. Institutional banking group’s total income of S$5.75bn declined 5% y-o-y, with weaker contribution from SMEs (-19% y-o-y) and lower market activity weighing on investment banking income while gains were seen in loan related and trade income (from better margins) and treasury income (driven by interest rate products).

India franchise expanded with promising medium term growth prospects

  • Regions wise, Hong Kong’s full year total income and earnings fell 15% and 34% respectively, with profit before allowances of S$1.48bn declining 21% y-o-y. General provisions of S$177mn were taken as a pre-emptive move.
  • DBS expanded its India franchise with the amalgamation of LVB with DBS India effective 27 November 2020, with close to 600 branches and 1000 ATMs. Deposit franchise in India has been strengthened with the addition of two million retail and 125k non-retail customers. Net NPA was transferred with general provisions increased to 9.5% of performing loans. Overall the LVB transaction had a minimal 0.3%pt to group CET1 ratio.

Balance sheet remains in good health

  • As of Dec 20, DBS's CET-1 ratio was 13.9% (vs June 20’s 13.7%), while leverage ratio was 6.8%. Allowance coverage ended the year at 110%, or 206% inclusive of collateral.
  • General provision reserves of S$4.31bn (+72%) exceeds MAS’s minimum requirements by 42%.

Optimistic outlook on business pipeline and growth momentum for 2021

  • Optimistic outlook on business pipeline and growth momentum for 2021, supported by an ongoing economic recovery and new growth platforms proactively added to the bank’s franchise (Lakshimi Vilas Bank, China Securities JV, Digital Exchange, retail wealth planning and supply chain digitalization).
  • January 2021 has started on a strong note, with higher income from a year ago, driven by treasury markets and fee income growth, while loans and deposit growth momentum are also strong. NIMs are expected to range between 1.45-1.5% ahead, with some pressure expected but bulk of the pain from last year’s rate cuts is already taken.

Credit outlook looks encouraging with significant decline in loans under moratorium

  • Credit outlook looks encouraging with significant decline in loans under moratorium from peak levels across key segments of Singapore housing and SME loans (reduced to 10% and 25% respectively), and Hong Kong large corporate and SME (down to 50%).
  • Total allowances over a two-year period are expected to come in at the middle of its S$3-5bn range, with more visibility expected towards middle of this year with progression of extended moratoriums.

DBS has recently raised its sustainable finance target to S$50bn for 2024

  • DBS has recently raised its sustainable finance target to S$50bn for 2024, more than double its previous S$20bn target by 2023, reflected increased demand and the bank’s commitment to grow green financing as part of its “responsible banking” philosophy.
    DBS also noted that there has been an increase in interest from companies wishing to implement their corporate sustainability agenda through sustainable loans, and sees a good mix of potential deals across key markets and sectors. Although the majority of the green loans are currently extended to real estate developers, the bank is also involved in the financing of renewable energy equipment makers and electric vehicle battery parts.
  • Since 2018, DBS has concluded over 100 sustainable financial deals (~S$17bn in total), with landmark transactions in 2020 including the USD1.11bn dual-tranche green project bond (Star Energy Geothermal), PSA Marine’s EUR30mn three-year sustainability linked loan and EUR500mn Korea Housing Finance Corporate COVID-19 social bond.

Constructive stance maintained, lifting our fair value for DBS further to S$29.50

  • We have updated our DBS's provisions forecasts to ~S$4.3bn over 2 years (FY20E-21E), pegged at the middle of management’s S$3-5bn range guided and implying a lower S$1bn in provisions for FY21E following 2020’s aggressive front loading of S$3.07bn.
  • With a recovery outlook for FY21E, relatively resilient asset quality trends and our house’s continued expectation of a rotation towards value sectors such as financials this year, we lift our fair value for DBS to S$29.50 (DDM) implying 1.47x price/book multiple and 12.9x FY21E PER.
  • See DBS Share Price; DBS Target Price; DBS Analyst Reports; DBS Dividend History; DBS Announcements; DBS Latest News.

Continue to await regulatory update on dividends of Singapore banks, scope for normalization given the sector’s strong capital position

  • DBS announced 4Q dividend of S$0.18 per share, in line with regulatory guidance (FY20 dividends are capped at 60% of FY19 DPS), which brought FY20 dividend S$0.87 per share. As DBS pays dividends on a quarterly basis, its current dividend restriction guided by regulators will be in place until 1Q 2021. See DBS Dividend History.

OCBC Research Team OCBC Investment Research | https://www.iocbc.com/ 2021-02-10
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