DBS Group - Phillip Securities 2021-02-15: Tenacity From Diversity

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DBS GROUP HOLDINGS LTD (SGX:D05)

DBS Group - Tenacity From Diversity

• DBS (SGX:D05)'s FY20 earnings in line as lower credit costs compensated for weaker-than-expected income.
• NIM fell 27bps to 1.62% y-o-y but loan growth of 4% y-o-y cushioned NII. NIM further contracted 4bps to 1.49% q-o-q.
• Fees and commissions grew 1% y-o-y, recovering to pre-COVID levels.
• Allowances matched 3Q20 levels despite the consolidation of troubled Lakshmi Vilas Bank (LVB).
• We increase DBS's FY21 earnings forecast by 6% for lower allowances following a better credit outlook.

The Positives

Fees and commissions back to pre-COVID levels

• DBS's fees and commissions grew 1% y-o-y in 4Q20 from S$741mn to S$747mn. WM fees grew 21% y-o-y to offset weakness in investment-banking and credit-card fees.
• We forecast 12% growth in fees and commissions for FY21e as economic conditions improve. Investment-banking and credit-card fees are expected to recover to pre-COVID levels while WM fees should continue to power ahead.

FY20 allowances at lower end of 2-year guidance

• DBS's 4Q20 allowances of S$577mn ticked up 4% q-o-q. They included S$183mn of GP from its consolidation of LVB.
• FY20 allowances totalled above S$3bn. But this was at the lower end of the S$3-5bn guided by the bank for FY20-21. GP reserves hit S$4.31bn, in excess of MAS’ requirement by 42%.
• We think that FY20 provisions will be sufficient for asset-quality deterioration in FY21 and expect credit costs to normalise to pre-COVID levels along with the economic recovery.

The Negative

NIM down by 4bps q-o-q to 1.49%

• NIM further tightened in 4Q20, contributing to a 2% decline NII q-o-q. FY20 NII fell 6% on a 27bp y-o-y drop in NIM. The impact on NII was muted by 4% loan growth y-o-y in FY20.
• DBS guided for NIM of 1.45-1.50% for FY21e as interest rates stabilise. Nevertheless, a cheap funding environment should allow it to continue with its low-yield lending, including interbank loans, to boost NII.

Outlook

Clarity on loan moratorium

• Loans under moratorium fell significantly to S$4.5bn, to roughly 1.2% of DBS’ loan book, as Singapore exited the first phase of its loan moratorium. Low delinquencies from the loans that exited moratorium support a lower credit-cost forecast of S$1bn for FY21e. This implies FY20-21 allowances of S$4bn, midway of the S$3-5bn range guided by the bank.

Pipeline for growth

• DBS’s LVB consolidation will expand the bank’s footprint in India. Earlier operating concerns have waned after DBS took decisive action to provide for NPAs.
• DBS’s securities JV in China and digital-exchange partnership with SGX are also expected to augment its business from FY21.

Investment Action

Upgrade DBS to ACCUMULATE with higher target price of S$29.50, up from S$22.60

• We raise DBS's FY21e earnings forecast by 6% as we lower allowances by S$1bn. We also lower COE in our GGM valuation from 9.4% to 8.2% and assume a 10.1% FY21e ROE. This reflects lower risks as equity markets improve.
• Upgrade DBS to ACCUMULATE from NEUTRAL with higher GGM target price of S$29.50, from S$22.60. We now assume 1.31x FY21e P/BV in our GGM valuation, up from 1.26x.
• See DBS Share Price; DBS Target Price; DBS Analyst Reports; DBS Dividend History; DBS Announcements; DBS Latest News.

Tay Wee Kuang Phillip Securities Research | https://www.stocksbnb.com/ 2021-02-15

SGX Stock Analyst Report ACCUMULATE UPGRADE NEUTRAL 29.50 UP 22.600