DBS Group - OCBC Investment 2021-05-03: Starting The Year With A Bang


DBS Group - Starting The Year With A Bang

  • DBS's 1Q21 net profits crossed the S$2bn mark for the first time, driven by stronger than expected trading income, provisions writeback and a recovery in business momentum.
  • FY21E guidance is upgraded, supported by a strengthening economic recovery and resilient asset quality.
  • Double-digit gains in DBS's share price year to date, underscoring our latest BUY call in February and constructive stance last year.
  • Fair value estimate for DBS is lifted to S$33 implying 1.5x price/book.

DBS's 1Q21 results was a strong beat

  • DBS (SGX:D05)'s 1Q21 net profits of S$2.009bn (+72% y-o-y/+98.5% q-o-q) crossed the S$2bn mark for the first time, driven by stronger than expected trading income (doubled q-o-q & y-o-y-but unlikely to be sustained), provisions writeback and a recovery in business momentum.
  • Key results highlights include record fee income (+15% y-o-y, broad based across wealth management, transaction fees and card fees).
    • Net interest income grew 2% from previous quarter/fell 15% y-o-y (due to lower rates), supported by stable net interest margin and modest loan growth (3% q-o-q), across segments:
      • Singapore housing loans grew 1% driven by strong bookings,
      • non-trade corporate loans +2% across industries, and
      • trade loans gained 6% from stronger demand and higher commodity prices.
    • Non interest income was solid, up 53% q-o-q/+13% y-o-y, supported by fee income growth (+28% q-o-q, +15% y-o-y). Wealth management fees was also strong, gaining +24% y-o-y.
  • Expenses rose 2% from a year ago, bringing overall cost income ratio to 41%.
  • Liquidity remained ample with increase in deposits (+2% q-o-q). CET1 ratio ~14.3%.

Despite tapering of loan moratoriums, asset quality trends have remained benign

  • NPA declined 2% q-o-q, with NPL rate of 1.5%. New NPA formation is below pre-pandemic levels. GP reserves stood at $4.13bn (above regulatory minimum by 31%). Full year allowances are expected at below $1bn.
  • DBS's management does not expect to see material deterioration on this front (more comfortable on Singapore), although it has highlighted uneven pace of moratorium expiries regionally.

Inorganic growth update, potential interest to explore bolt-on opportunities from Citigroup’s plan to dispose of select Asia consumer business

  • In the post results call, DBS's management shared its interest to explore potential bolt-on opportunities from Citigroup’s plan to dispose of selected Asia consumer businesses, citing some similarities identified with its past ANZ acquisition for markets such as Taiwan and Indonesia.

DBS also provided an update on the recent 2 acquisitions:

  • On Lakshimi Vilas Bank, the integration is progressing with promising key business metrics (deposits: CASA +14%, cost of deposits declined 40bps, for loans: gold loans grew 4%, renewals on course) while asset quality is tracking in line with management expectations (legacy NPA portfolio of $212mn has been reduced to $186mn, additional SP of $26mn was made against identified weaker areas in the portfolio);
  • For the latest announcement on privately owned Shenzhen Rural Commercial Bank (SZRCB), the bank is taking a 13% stake (i.e. CNY5.3bn, ~1x FY20 price/book) and will become the single largest shareholder with board representation. Transaction is pending approval from China Securities Regulatory Commission.
    • SZRCB was established in 2005, and has 210 branches in Shenzhen (217 in total), with ~40% of its total loans in the retail segment and balance in the corporate segment (mostly Shenzhen based SMEs).
    • This transaction should be immediately accretive and will be funded using internal cash resources (estimated impact on group capital ratio should be less than 0.2pp). SZRCB’s 9M20 NPL ratio of 1.4% is better than the sub-2% level for the banking industry.
    • We view this transaction positively given it should help extend the bank’s reach within the Greater Bay Area through SZRCB’s more than 170k active corporate customers and ~5mn active retail clients. DBS has the option to raise its stake in SZRCB further and sees upside from potential listing in future.

Improved growth outlook with various new businesses being developed

  • Management cited an unusual 1Q which saw a strong jump in trading income, which should normalize going forward. DBS has upgraded its guidance, with full year loan growth lifted to mid-high single digit, and fee income growth expected to be at double digits this year. Expenses should also be higher by 3-4% from a year ago to support ongoing business growth. With encouraging asset quality trends, full year total allowance is expected to be kept below $1bn.
  • Other businesses DBS is currently working on include
    • a new blockchain based platform (Partior-partnership with JPM and Temasek to build infrastructure and offer best in classs global cross-border payment solutions) which is targeted to be launched in 3Q21, and
    • the digital exchange, where further scaling of the business should come in subsequent quarters (extend trading hours to 24/7 and issuance of security tokens) and while business is steadily building up (daily trading value grew 10x since launch, ~120 investors, digital assets under custody > $80mn), more meaningful contribution should only be possible from FY22E.

Continue to await regulatory update on dividends, capacity to revert to pre-COVID-19 dividend payouts given its strong capital position

  • DBS announced 1Q dividend of S$0.18 per share, in line with regulatory guidance. While we await regulatory update on the sector’s dividends, our base case expectation is for an easing of restrictions in line with global peers, which should be supportive of share prices.
  • See DBS's Dividend History.

Lifting fair value estimate of DBS to S$33.00

  • DBS's share price has gained double digit year to date, adding +16% since our latest BUY call in February. Following the latest beat in 1Q results and upgraded management guidance, we lift our estimates to reflect expectations for stronger non interest income growth and lower credit costs. Our fair value estimate for DBS is raised to S$33.00 (DDM), which implies 1.53 price/book.
  • While NIMs should remain stable (~1.5%) due to a low rate environment, we think DBS’s ongoing efforts on various new business drivers bode well for its medium term growth prospects and expect a gradual uplift in ROEs to materialize as the economic recovery strengthens further (although a more meaningful pick-up in ROE towards the 13% level should still be driven by higher interest rates).
  • See

OCBC Research Team OCBC Investment Research | https://www.iocbc.com/ 2021-05-03
SGX Stock Analyst Report BUY MAINTAIN BUY 33.00 UP 29.500