DBS - UOB Kay Hian 2021-02-11: Tapping On New Platforms LVB & Chinese Securities JV

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DBS GROUP HOLDINGS LTD (SGX:D05)

DBS - Tapping On New Platforms LVB & Chinese Securities JV

• DBS's 4Q20 results were in line with expectations. NIM is likely to have bottomed and we expect credit costs to ease from 80bp in 2020 to 40bp in 2021. However, LVB’s NPL ratio of 31% would raise some eyebrows. The lawsuit in India regarding cash compensation for shareholders of LVB that have been wiped out remains unresolved.
• We expect DBS's dividend yield to improve from 4.2% in 2021 to 5.1% in 2022.
• Maintain HOLD on DBS. Target price: S$29.30. Entry price: S$25.32.

DBS' 4Q20 Results

• DBS (SGX:D05) reported net profit of S$1,012m for 4Q20, down 33% y-o-y and 22% q-o-q. The results were in line with our expectations of S$1,002m but below consensus estimate of S$1,063m.

NIM has bottomed.

• In constant currency terms, loans expanded S$5b or 1% q-o-q in 4Q20, driven by residential mortgages (strong bookings in 3Q20) and drawdowns for non-trade corporate loans. Lakshmi Vila Bank (LVB) added loans of S$2b. However, NIM narrowed 37bp y-o-y and 4bp q-o-q to 1.49% due to the plunge in interest rates during Mar 20, causing net interest income to decline 13% y-o-y.

Total deposits expanded 15% yoy.

• LVB added deposits of S$3b. On a group-wide basis, CASA balances grew 42% y-o-y (savings accounts: +24% y-o-y, current accounts: +75% y-o-y). CASA ratio improved 14ppt y-o-y to 73%.

Moderation in pace of recovery.

• Fees were flat y-o-y but receded 6% q-o-q to S$747m in 4Q20. Wealth management fees grew 21% y-o-y (low base in 4Q19) but contracted 9% q-o-q. Assets under management (AUM) expanded 7% y-o-y to S$264b. Contribution from cards declined 12% y-o-y as travel remained subdued. There were also lower contributions from investment banking (-55% y-o-y) and transaction services (-5.5% y-o-y).
• Other non-interest income increased 35% y-o-y to S$396m due to higher trading income.

Credit costs remain elevated.

• New NPLs of S$541m in 4Q20 was in line with NPL formation for 9M20. Provisions increased 4% q-o-q to S$577m. General provisions of S$214m include S$87m for LVB. Specific provisions increased 14% q-o-q to S$363m. Credit costs stay elevated at 61bp (3Q20: 58bp).

Amalgamation with LVB completed on 27 Nov 20.

• DBS incurred provisional goodwill of S$153m, which represents the difference in fair value of LVB's assets and liabilities. LVB has gross NPLs of S$881m (LVB's NPL ratio at about 31% pre-amalgamation). The amalgamation added NPLs of S$212m (net of specific provisions of S$669m), which are fully secured. DBS's NPL ratio was unchanged at 1.6% post the amalgamation with LVB.
• The board has proposed quarterly dividend of 18 cents (scrip dividend is applicable).

DBS maintain guidance for 2021.

• Management guided mid single-digit loan growth and double-digit fee income growth for 2021. NIM is expected to moderate to 1.45-1.50%. Management expects cost/income ratio to remain flat at 2019’s level of 43% in 2021.

Plotting expansion in India and China.

• DBS has established the following new platforms for growth:
  1. LVB,
  2. 51%-owned DBS Securities (China) Ltd,
  3. Digital Exchange to provide tokenisation, trading and custody of digital assets,
  4. expansion in retail wealth management with financial planning tools, and
  5. supply chain digitalisation.

Strengthened franchise in India with amalgamation of LVB.

• LVB has 563 branches and 974 ATMs, of which 88% are in South India. It has 2m retail and 125,000 SME customers. DBS India was previously predominantly wholesale funded. LVB allows DBS India to tap on deposits from retail and SME customers. LVB has performing loans of S$1.9b (retail: S$0.8b, SME: S$1.1b). India accounted for 1.5% of DBS’s total loans post-amalgamation of DBS India and LVB. Management expects LVB to turn profitable in 12-24 months’ time and estimated profits of S$20m-30m per year.

Loans under moratorium contracted significantly by 77%.

• Loans under moratoriums have dwindled from 5.1% to 1.2% of total loans due to expiry of moratorium (many borrowers did not seek extension). In Singapore, loans under moratorium declined by 90% for residential mortgages and 75% for SME loans. In Hong Kong, loans under moratorium for large corporates and SMEs declined 50%. Delinquencies were low for borrowers exiting moratorium.

Anticipates lower credit costs in 2021.

• NPL formation is expected to trend upwards as government relief programmes end in 1H21. 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 provisions of S$3b upfront in 2020, provisions are expected to be lower at S$800m-1,000m in 2021.

DBS - Earnings revision

• We raised our DBS's net profit forecast for 2021 slightly by 3% due to lower credit costs of 40bp (previous: 43bp). We have factored in aggregate provisions of S$4.5b and credit costs of 120bp during the two-year period in 2020 and 2021.
• See DBS Share Price; DBS Target Price; DBS Analyst Reports; DBS Dividend History; DBS Announcements; DBS Latest News.
• Maintain HOLD. Our target price of S$29.30 is based on 1.34x 2022F P/B, derived from el (ROE: 10.4%, COE: 8.0%, growth: 1.0%).

Jonathan KOH CFA UOB Kay Hian Research | https://research.uobkayhian.com/ 2021-02-11

SGX Stock Analyst Report HOLD MAINTAIN HOLD 29.300 DOWN 29.45